ACC 310F Chapter Notes - Chapter 2: Regression Analysis, Cost Accounting, Fixed Cost

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7 Feb 2017
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Understanding Cost Structure
Estimate the profit of short-term decision options
Ex. decision to offer yoga
Revenue: Assume Tom and Lynda expect to gain 30 new members from
offering yoga, and the monthly revenue per member is $80. (30 new
members × $80 = $2,400 per month, or $28,800 per year)
Change in cost: We can estimate the cost of a decision option as the sum
of
(1) the change in fixed costs and
(2) the change in variable costs, which can be calculated as the
unit variable cost times the change in activity volume.
Fixed costs: The yoga instructor's annual salary of $10,000
is a fixed cost that is attributable to the decision to offer the
yoga class. In addition, Tom and Lynda plan to spend
$2,000 annually advertising the yoga program. Combining
both, we can estimate the additional fixed costs connected
with the yoga class at $12,000 per year.
Variable costs: The monthly
variable cost per member is $30. Multiplying this $30
variable cost per member by the 30 new members show
that variable costs would increase by $900 per month, or
$10,800 annually.
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Practice Quiz:
Molly's response indicates that
she believes all of her costs
are variable. That is, she
appears to believe that it costs
$16.50 per record regardless
of the number of records sold.
Molly does not appear to
realize that some of her costs
are fixed, and therefore
invariant to sales volume
(records sold), while some of
her costs are variable and,
indeed, increase proportionally
with sales volume. Many of
Molly's costs are likely to be
fixed, including costs
associated with leasing the
land and building, having full-
time employees, maintaining a
computer network, etc. Thus,
Molly's decision should be
made on the basis of whether
the increase in revenue
associated with reducing the
selling price is more than the
increase in variable costs
associated with reducing the
selling price.
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