Which of these 8 cost categories would be considered variable, and why?
Costs which we expect to vary directly with production would be classified as variable. Costs which would remain fixed would be classified as fixed costs. Costs which vary but not directly would be classified as mixed costs.
Looking at the costs, Direct materials, other expenses which seem to vary with production levels and machine operators (assuming these are paid on hourly basis) would be classified as variable cost.
Which of these 8 cost categories would be considered fixed, and why?
Building depreciation, management staff and other expenses that don’t seem to vary would be classified as fixed costs and these costs would remain the same at all production levels.
Which costs would be considered mixed (i.e., semivariable or semifixed)?
Utility cost would be mixed since it seems to have a fixed portion ( there is no production) and a variable part (since the total costs change with production)
Ignoring utility costs altogether, what is the contribution margin per unit, in dollars and in percentage?
Contribution margin = selling price – variable cost
Selling price per unit = $5,000
Total variable costs = 100,000 + 4,000,000 + 3,000,000 = 7,100,000 per year
Total units produced = 4,000 X12 = 48,000 per year
Variable cost per unit = 7,100,000/48,000 = 147.92
Contribution margin per unit = 5,000-147.92 = $4,852.08
Contribution margin percentage = 4,852.08/5,000 = 97.04%
Ignoring utility costs altogether, what is the breakeven level of sales?
Breakeven units = Fixed cost/contribution margin per unit
Fixed costs = 200,000 + 400,000 + 1,300,000 = 1,900,000
Breakeven units = 1,900,000/4,852.08 = 391.58 units
Breakeven sales = 391.58 X 5,000 = $ 1,957,921.85
Ignoring utility costs altogether, if instead of breaking even, the firm wants to make $10,000/month profit, answer the following:
How many units must be sold each month?
Units to be sold = (Fixed cost per month + desired profit)/contribution margin per unit
Fixed cost per month = 1,900,000/12 = 158,333.33
Units to be sold = (158,333.33 + 10,000)/4,852.08 = 34.69 units
Sales dollars = 34.69 X 5,000 = $173,465.01
In year 2, the chief executive officer (CEO) plans to add $300,000/year of expense in added administrative salaried head count. Ignoring utility costs altogether, how many additional units must be sold just to pay for this added expense?
Units to be sold = Added expense/unit contribution margin = 300,000/4,852.08 = 61.83 units
Variable cost per unit = (change in cost)/change in units = 20,000/4,000 = $5 per unit
Fixed cost = Total cost – variable cost = 40,000 – 4,000 X 5 = $20,000
References
1. Stevenson, W.J. (2011). Operations Management. United States. McGraw-Hill Irwin.
2. Garrison, Noreen and Brewer. (2009). Managerial Accounting, United States. McGraw-Hill Irwin.
