COST STRUCTURE

Question 1

CONCEPTS OF FIXED COSTS AND VARIABLE COSTS

Answer 1

FIXED COSTS REMAIN THE SAME NO MATTER THE VOLUME OF SALES OR PRODUCTION ( RENT, LABOR, INSURANCE)
VARIABLE COSTS WILL BE PROPORTIONAL TO THE VOLUME OF SALES AND PRODUCTION ( INGREDIENTS, RAW MATERIAL, PACKAGING)

Question 2

WHAT IS THE RELATIONSHIP BETWEEN COSTS AND VOLUME

Answer 2

THE MORE YOU PRODUCE, MORE SUPPLIES YOU WILL NEED TO BUY AND USING THE BARGAINING POWER A FIRM CAN REDUCE THE COSTS OF PRODUCTION AND INCREASE PRODUCTION AT THE SAME TIME (NOT SURE ABOUT THIS ANSWER)

Question 3

WHAT IS THE BREAK EVEN ANALYSIS?

Answer 3

IS A VOLUME, REVENUE AND COST ANALYSIS THAT WILL WHEIGH COSTS AGAINST SELLING PRICE. THE BEA HELPS MANAGERS TO UNDERSTAND THE AMOUNT OF ACTIVITY NECESSARY TO BE PROFITABLE, IT HELPS TO IDENTIFY IF PRICING WAS DONE CORRECTLY AND IT HELPS ENTREPRENEURS TO DECIDE IF LAUNCHING ANEW PRODUCT IS VIABLE OR NOT

Question 4

WHAT IS THE BREAK EVEN POINT

Answer 4

IS WHERE THE COSTS OF PRODUCING ARE EQUAL TO THE REVENUE. IT IS ALSO CALLED EQUILIBRIUM POINT

Question 5

WHAT IS CONTRIBUTION MARGIN

Answer 5

IS THE CONTRIBUTION THAT WILL GO TO PAYING THE FIXED COSTS OF CORE OPERATIONS

Question 6

WHAT IS OPERATING RISK?

Answer 6

IS THE PROBABILITY OF HAVING POSITIVE OR NEGATIVE INCOME WHEN TAKING INTO ACCOUNT THE FLUCTUATION OF SALES. IS HOW THE VOLUME OF SALES AFFECTS THE NET INCOME/LOSS OF THE FIRM.

Question 7

A)FIRMS WITH HIGH OPERATING RISK HAVE ……….
B)FIRMS WITH LOW OPERATING RISK HAVE ………..

Answer 7

A) HIGHER FIXED COSTS, LOWER VARIABLE COSTS AND HIGHER PROFIT
B) LOWER FIXED COSTS, HIGHER VARIABLE COSTS AND LOWER PROFIT

Question 8

WHAT IS OPERATING LEVERAGE? WHAT IS THE RELATIONSHIP WITH OPERATING RISK?

Answer 8

THE DEGREE TO WICH A FIRM CAN INCREASE OPERATING INCOME BY INCREASING REVENUE.
THE OPERATING LEVERAGE IS USED TO CALCULATE THE OPERATING RISK AND THE HIGHER THE OPERATING LEVERAGE, HIGHER THE RISK AND HIGHER THE PROFITS OF A FIRM