ch04 - Chapter 4 Cost-Volume-Profit Analysis QUESTIONS 1 A...

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Chapter 4 Cost-Volume-Profit Analysis QUESTIONS 1. A mixed cost is a cost that has a fixed cost component and a variable cost component. For example, the amount paid for telecommunication services would be a mixed cost if there was a fixed monthly fee plus a charge for use. 2. Discretionary fixed costs are those fixed costs that management can easily change in the short-run (e.g., advertising). Committed fixed costs are those fixed costs that cannot be easily changed in the short-run (e.g., rent). 3. Commissions paid to salespersons and direct materials are examples of variable costs. There are many more. 4. Rent and insurance expenses are examples of fixed costs. 5. Salespersons are paid a base salary plus commissions. The base amount is fixed and commissions are variable. Thus, total compensation paid to the sales force is mixed. 6. With account analysis, managers use judgment to classify costs as either fixed or variable. The total of the costs classified as variable can then be divided by a measure of activity to calculate the variable cost per unit of activity. The total of the costs classified as fixed provides the estimate of fixed cost. 7. The relevant range is the range of activity for which estimates of costs are likely to be accurate. 8. The contribution margin is equal to the selling price minus variable cost. The contribution margin ratio is the contribution margin per dollar of sales, i.e., the contribution margin divided by the sales price. 9. It would not be appropriate to focus on weighted average contribution margin per unit if the units were dissimilar (e.g., pencils and computers at an office supply warehouse). 10. Companies that have relatively higher fixed costs are said to have higher operating leverage. Thus, a software company with a large investment in research and development (a fixed cost) would likely have higher operating leverage compared to a manufacturing company that used little equipment but expensive labor (a variable cost).
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Jiambalvo Managerial Accounting EXERCISES E1. LO 1 With high fixed costs, a business is quite risky. This follows because if sales fail to meet expectations, the company may have a large loss. Audrey may be able to make rent a variable expense—pay the mall owner a percent of total revenue rather than a fixed monthly amount. This type of arrangement is quite common in shopping malls. She may also be able to pay employees relatively low base salaries with bonuses tied to sales. This would make salary expense more of a variable expense. E2. LO 1, 5 The cost structure at Microsoft is heavily weighted toward fixed cost (e.g., research and development). Consider the variable cost associated with selling an additional unit of the product “Office” through the OEM (original equipment manufacturer) channel. The product sells for well over $100 but the incremental cost (ignoring tax) is probably less than $1. With high operating leverage, it’s not surprising that profit grew faster than sales.
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