# Ch04 - Chapter 4 Cost-Volume-Profit Analysis QUESTIONS 1...

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Chapter 4 Cost-Volume-Profit Analysis QUESTIONS 1. Variable costs are costs that change in response to changes in activity (e.g., production or sales activity). Fixed costs are costs that do not change in response to changes in activity. 2. 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. 3. 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). 4. Commissions paid to salespersons and direct materials are examples of variable costs. 5. Rent and insurance expenses are examples of fixed costs. 6. 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. 7. With telecom, there is likely to be a basic service charge (fixed) plus a charge for use (which will be variable if use increases with business activity). 8. The horizontal axis would be production. 9. 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. 10. With the high-low method, you use the highest and lowest levels of activity . 11. The relevant range is the range of activity for which estimates of costs are likely to be accurate. 12. The contribution margin is equal to the selling price minus variable cost. The contribution margin ratio is the contribution margin per dollar of sales. 13. The profit equation states that profit is equal to revenue (selling price times quantity) minus variable cost (variable cost per unit times quantity) minus total fixed cost. Profit = SP (x) - VC (x) - TFC

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Managerial Accounting 14. 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). 15. The assumptions in C-V-P- analysis are: 1. Costs can be separated into fixed and variable components. 2. Fixed costs remain fixed and variable costs per unit do not change. 3. When performing multiproduct C-V-P, an important assumption is that the mix remains constant. 16. 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). 17.
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## This note was uploaded on 09/15/2011 for the course ACCT 614 taught by Professor Unknown during the Spring '10 term at Alabama State University.

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Ch04 - Chapter 4 Cost-Volume-Profit Analysis QUESTIONS 1...

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