acc 640 - ACCT640 CASE#1#3-43 1 As we can see from the...

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ACCT640 CASE #1 #3-43: 1. As we can see from the picture, both cost behaviors have a linear relationship. The existing cost system has a lower fixed cost, therefore is lower when the capacity is low. The build option has a higher fixed cost, which costs more when the capacity is low but will cost less when the company is operating with higher capacity (>100%). At 100% capacity, both options yield the same cost. 2. I think the existing cost system option enables HP’s managers to control risk better. With lower fixed cost and higher variable cost, the structure allows HP to remain flexible and under control when the market is going down since it’s always easier to reduce variable costs than to reduce fixed costs. Also, the build option is only profitable to the company when the company is operating more than 100% of its current capacity, which is more risky when the market is down. The cost-benefit trade-offs associated with the 2 options is: .An increased in $20m annual fixed cost for the build option will help save $12m annual
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This note was uploaded on 04/07/2011 for the course ACCT 640 taught by Professor N/a during the Spring '11 term at Davenport.

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acc 640 - ACCT640 CASE#1#3-43 1 As we can see from the...

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