BU121 Lecture Notes - Variable Cost, Fixed Cost

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12 Mar 2013
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March 12, 2013 bu121
CVP recap-
When you look at the market as a whole how many percent you would need to cover your cost?
Decide when to change strategy in order to make more money
Top Hat Monocle
If you were considering a new strategy that would increase your fixed costs by $5000, but decrease your
variable costs from $20 to $10 unit on a product with a price of $50, at how many units of sales would
this strategy make sense?
Correct answer 500
-CFC is 5000
-drop variable cost by 10
-50*10 = 500
Assume:
ABC Company currently sells 400 units of a product at $250/unit and variable costs are $150/unit…
contribution per unit = 250 -150 = 100 per unit
total $ contribution = 100/unit x 400 unit = $40 000
contribution margin = 1 150/250 =40%
If increasing advertising by $10,000 meant that sales would increase by $30,000, would you do it?
-you have to run the numbers before deciding
Step one
-figure out the change in contribution
Step 2
Compare to the fixed cost
Step 3
Figure out are you better off or worst off
30 000 x 40% contribution = 12 000 additional contribution
Vs 10 000 increase in FC
It looked like a 20 000 difference but when you run the calculation it is actually a 2000 dollars difference
-therefore it is better to do this, but is there any impact to make this decision?
-there is not qualitative issues towards this so we can proceed the decision
If you could decrease variable costs by $25/unit, but it would mean that quality would also decrease
and as a result sales would drop to 350 units, would you do it?
250 125 = 125 dollars contribution per unit
X 350 units = $43750 total contribution
Vs $40 000 additional contribution of $3750
YES, quantitatively
Qualitative issues? (can effect brand, is it worth the 3750 to make this decision)
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Document Summary

Decide when to change strategy in order to make more money. Abc company currently sells 400 units of a product at /unit and variable costs are /unit . Contribution per unit = 250 -150 = 100 per unit. Contribution margin = 1 150/250 =40% total $ contribution = 100/unit x 400 unit = 000. You have to run the numbers before deciding. Figure out are you better off or worst off. 30 000 x 40% contribution = 12 000 additional contribution. It looked like a 20 000 difference but when you run the calculation it is actually a 2000 dollars difference. There is not qualitative issues towards this so we can proceed the decision. 250 125 = 125 dollars contribution per unit. X 350 units = total contribution. Vs 000 additional contribution of . Qualitative issues? (can effect brand, is it worth the 3750 to make this decision) - 165 = contribution per unit.

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