The joint cost allocation is only useful for product

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The joint cost allocation is only useful for product costing in financial reporting. These different costsresulted from four different cost allocation methods are not useful for production decision making or productprofitability analysis. Incremental analysis is better suited for production decision purposes.
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Chapter 9 / Exercise EX9-3
Managerial Accounting
Warren/Tayler
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Chapter 2118.4 Makala Oyster Company has increased its variable costs per kg of oysters harvested. However,its fixed costs decreased as a result of these changes. Why might this happen and how will thesechanges affect the firm’s break-even sales volume? LO 18.5An increase in variable costs per unit can result in decreased fixed costs if the behaviour of a cost haschanged such that it requires a change in classification. An example is the increasing opportunity to hire equipment asand when required rather than purchase the equipment and record fixed depreciation costs. This means that the variablecost per unit has increased but the fixed costs have decreased.At Malaka Oyster Company it is possible that crew members were previously rewarded on the basis of afixed payment per trip but this has changed to the size of the catch. The unit contribution margin, which is thedenominator of the break-even (sales volume) equation, decreases when the unit variable cost increases. This increasesthe break-even point. However, the fixed cost (the numerator) has decreased, and this will decrease the break-evenpoint.So, the firm’s break-even sales volume increases with the decrease in unit contribution margin but woulddecrease when there is a decrease in fixed costs. Whether the final break-even sales volume has increased or decreasedwill depend on the relationship between the decreases in (a) the numerator and (b) the denominator. If both increase bythe same percentage the break-even sales volume will remain the same. If the fixed costs decrease by a greaterpercentage than the unit contribution margin the break-even volume will reduce, and vice versa.18.7 Explain whatsafety marginmeans? How can managers use this information to manage theprofitability of a business? LO 18.5Thesafety marginis the amount by which budgeted sales revenue exceeds break-even sales revenue.It is the amount by which actual sales can fall below budgeted sales before losses are incurred.Managers may use this information to highlight how close a project or enterprise is to the break-evenpoint and hence focus on maintaining activities so that revenue does not fall below the break-evenpoint. In this way managers can focus on keeping operations profitable, which adds to shareholdervalue.18.10 How could cost volume profit analysis be used in budgeting and making decisions aboutpricing coffee and cakes in a café? LO 18.5Cost-volume-profit analysis can be used in budgeting by projecting the profit that will be achieved atthe budgeted sales volume. Budgeting in a cafe business begins with a sales forecast of number ofcoffees and cake to be sold. A CVP analysis also shows how pricing would contribute to the

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Managerial Accounting
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Chapter 9 / Exercise EX9-3
Managerial Accounting
Warren/Tayler
Expert Verified

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