Variable Cost and Net Income

12 December 2016

I agree with this statement. I would also like to add that cost behavior is also identifying the key resources that are performed, resources used in performing these activities, costs of the resources, and what the cost is driven from. 2-2. Two rules of thumb when analyzing cost behavior are to manage what the company manufactures, sells, and to give advice as to where costs can be reduced. 2-3. Three examples of a variable cost are a 12% increase in the production of dresses, which will cause a 12% increase in variable costs. A 10% increase in clothes will cause an 10% increase in variable costs.

A 30% increase in labor hours will cause a 30% increase in variable costs. Three examples of a fixed cost are a 12% increase in airline costs but the fixed costs remain unchanged. A 50% increase in marketing advertisements and the fixed costs remain unchanged. Lastly, a 60% increase in units of production but the fixed costs remain the same.

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2-4. The word immediately is used in the definition of a fixed cost and not in the definition of a variable cost because changes to the cost drivers to not happen immediately with a fixed cost like they do with a variable cost. -5. I agree that it is confusing to think of fixed costs on a per-unit basis because changes to the cost driver take place at a slower rate than they do with a variable cost. So it would be difficult to single out any costs. 2-6. I disagree because you also must link the resource costs to the activities to get the result of your output. 2-7. I agree with this statement because fixed costs take longer to get back. That is why the relevant range is important for a fixed cost, since you can estimate the amount. 2-8.

The major assumption that underlies CVP analysis is the effects of output volume on revenue, expenses, and net income. When you know what the effects are you can then figure out where you can improve or make cuts. 2-9. I agree with this statement because any financial situation is different. In a fixed cost situation, the cost would remain unchanged. 2-10. I agree with this statement since the contribution margin also has total sales and the variable cost percentage in the equation. 2-11. A break-even analysis is a misnomer because the CVP is sometime referred to the break-even analysis.

A break-even point tells you at which point the profits exceed the expenses. The CVP can be used to plan, and make decisions based on sales or costs. 2-12. I do not agree with this statement because every company is different. One company may have higher expenses then another, making their break-even point higher. It does not matter what industry it is, because the break-even point will always be different based upon revenue or expenses. 2-13. I agree with this statement because it is important that you choose the correct method based upon your company’s revenue, expenses, and net income.

All three of these are good methods, but there may be a more detailed plan that works better for you. 2-14. Three ways of lowering a break-even point are lowering your expenses, lower the product levels and reducing your staff. 2-15. I agree with this statement because the incremental analysis will do the same as the CVP, such as seeking the change in revenue, expenses, and income. 2-16. Operating leverage is the firm’s ratio of fixed to variable costs. A highly leveraged company may be risky because little changes in sales volume result in large changes in net income. -17. An increase in sales volume would result in decreasing economies of scale for this company by the changes would decrease the net income, and would cause higher variable costs. 2-18. The relationship between margin of safety and the break-even point is they both show where the company needs to be in order to make a profit. Also, it shows where expenses equal revenues. 2-19. I disagree with this statement because the contribution ratio and the gross margin are never equal. 2-20.

I disagree with this statement because no organization has unlimited resources and knowledge of how costs change with volume changes. 2-21. The reason for the lower contribution margin could be that the break-even point was not met which caused expenses to not equal revenue. 2-22. The CVP formula for computing the income before taxes is adding the income or gain and subtracting your expenses. 2-23. The CVP formula for computing the effects of a change in volume on after-tax income is the total contribution margin divided by total sales which gives you the variable cost percentage.

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