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.
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).
Commissions paid to salespersons and direct materials are examples of variable costs.
Rent and insurance expenses are examples of fixed costs.
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.
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.
The relevant range is the range of activity for which estimates of costs are likely to be accurate.
The contribution margin is equal to the selling price minus variable cost. The contribution margin ratio is the contribution margin per dollar of sales, i.e., the contribution margin per unit divided by the sales price per unit.
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).
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).
a. As sales declines, variable costs will be reduced as well. Fixed costs, however, will remain constant. If large portion of costs in the cost structure are fixed the higher the operating leverage. When sales decline, profit will decline even faster because a small portion of the cost declines with sales (variable costs) but the fixed costs remain unchanged.
b. John can turn fixed costs into variable costs by outsourcing some services--for example, human resources. If the employees that provide services to building construction projects are salaried employees, John could replace them with independent contractors who are paid for work completed.
Oakland Hills Golf Course is more likely to focus on contribution margin per unit in Cost Volume Profit (CVP) analysis since each unit sold (a round of golf) is the same. Brook’s Men’s Clothing, however, is more likely to focus on contribution margin ratio in CVP analysis since each unit (an article of clothing) is very different (e.g., a shirt, suit, tie) and, as a result, a per unit contribution margin would only be an average over the different types of products.
The Coca-Cola Income Statement for 2010 (in million) is as follows:
Cost of goods sold
Selling and Administrative
The contribution margin ratio is 63.94% ($18,451 ÷ $28,857). To increase gross profit by $2 billion Coca-Cola would have to increase sales by $3.128 billion ($2 billion ÷ .6394). E4.
Depreciation appears to be a fixed cost.
Direct labor appears to be a variable cost.
Telecommunications appears to be a mixed cost. Note that the intercept is $75,000.
($20,500 - $8,500) ÷ (900,000 - 300,000) = $0.02 per copy of variable repair...
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