Week 2

Question 1

How to find contribution margin(CM)?

Answer 1

Selling price per unit minus variable cost per unit

Question 2

What is the breakeven point?

Answer 2

It is the point at which profit is zero

Question 3

What is the formula to find break even units?

Answer 3

Fixed expense/CM per unit = ? units

Question 4

What are the two types of VC. What are their differences?

Answer 4

True VC and Step VC

True VC: The amount of a true variable cost used during the
period varies in direct proportion to the activity level.

A step-variable cost is a resource that is obtainable only in large chunks (such as maintenance workers) and whose costs change only in response to fairly wide
changes in activity.

Question 5

1.What are the two type of fixed costs?

2. What are their differences
3. Give 2 examples of each type of fixed cost

Answer 5

1. Committed FC and Discretionary FC
2. Committed FC: Long-term, cannot be
   significantly reduced in
   the short term

Discretionary FC: May be altered in the
short-term by current
managerial decisions

3. Committed FC eg: Depreciation on Buildings and Equipment and Real
   Estate Taxes

Discretionary FC eg: Advertising and
Research and Development Expenses

Question 6

What is the relevant range for fixed cost?

Answer 6

The relevant range
of activity for a fixed
cost is the range of
activity over which
the graph of the
cost is flat.

Question 7

Is it true that Total FC does change within the relevant range?

Answer 7

False. Total FC does not change within relevant range

Question 8

How does this step-function pattern differ from a step-variable cost?

Answer 8

1.Step-variable costs
can be adjusted more
quickly as conditions
change

2.The width of the activity
steps is much wider
for the fixed cost.

3.Within the relevant
range, when the activity
level increases, stepVC can increase but
FC is constant

Question 9

What are mixed costs? Give an example.

Answer 9

A mixed cost (also called semi-variable cost) contains both variable and fixed elements.
Consider the example of utility cost. ( Electricity)

Question 10

Does total MC increase as activity increase?

Answer 10

Yes

Question 11

Does MC per unit decrease as activity increases?

Answer 11

Yes

Question 12

What is the equation for total mixed cost line?

Answer 12

Question 13

If your fixed monthly utility charge is $40, your variable cost is $0.03 per kilowatt hour, and your monthly activity level is 2,000 kilowatt hours, what is
the amount of your utility bill?

Answer 13

Y = a + bX
Y = $40 + ($0.03 × 2,000)
Y = $100