Chap5gnposting - Chapter 5 Cost Behavior Fixed Costs Mr...

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Chapter 5: Cost Behavior Analysis and Use 21 Chapter 5: Cost Behavior Fixed Costs: Mr. Walters, a salesperson, needs to rent an automobile for one day to visit customers of his firm. The best daily rate he can obtain is a flat $80, regardless of the number of miles he drives. He draws the following diagrams to get a better understanding of his total cost and his cost per mile (activity or volume). Car Rental Car Rental Total Fixed Cost Fixed Cost per Mile Cost Cost $100 .60 75 .45 50 .30 25 .15 0 100 200 300 400 500 0 100 200 300 400 500 Activity (in miles driven) Activity (in miles driven) Per unit FC is not a valuable measure for internal decision- making purposes. Committed fixed costs Long-term commitments (i.e. long-term assets) Discretionary fixed costs Annual FC (not dependent on volume) Fixed for a shorter period of time, usually annually (i.e. advertising costs) May be able to reduce over the short-term with minimal long-term damage to the business x x x x x To be covered in detail in Chapters 13 and 14. We do use per unit FC in order to determine costs for external financial reporting purposes. Cost of goods sold, for example.
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Chapter 5: Cost Behavior Analysis and Use 22 Variable Costs: Assume Mr. Walters could rent an identical automobile for $.20 per mile and would not be required to pay a daily rate. He draws the following diagrams to get a better understanding of his total and per mile costs. Car Rental Car Rental Total Variable Cost Variable Cost per Mile Cost Cost $100 .60 75 .45 50 .30 25 .15 0 100 200 300 400 500 0 100 200 300 400 500 Activity (in miles driven) Activity (in miles driven) The slope of the total variable cost line represents variable cost per unit . Problem : Assume Mr. Walters can either rent the automobile at $80 per day and pay nothing per mile driven (Option 1); or he can rent an identical car for $.20 per mile driven with no daily charge (Option 2). Which option should he choose?
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