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# Solved Finance Assignment: (Managerial Accounting) “It is confusing to think of fixed costs on a per-unit basis.” Do you agree? (Download Now)

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## Description

Solution Pages: 8

Word (.docx)

### Questions Covered in the Solution

Problem #1 (brief discussion)
a. “It is confusing to think of fixed costs on a per-unit basis.” Do you agree? Why or why not?
b. Why is “break-even analysis” a misnomer?
c. Describe three ways of lowering a break-even point.
d. “There is no such thing as fixed cost. All costs can be “unfixed” given sufficient time.” Do you agree? What is the implication of your answer for CVP analysis?
e. Define contribution margin, contribution margin per unit, and contribution margin rate.

Problem #2
Refer to “Unraveling the mystery of IT costs” to this question.
Discuss what results were achieved by the wholesale bank through its cost transparency program in both supply cost controls and demand management.

Problem #4
Refer to problem #3. (a) Construct a cost-volume-profit graph for Case #2 that depicts the total revenue, total variable cost, total fixed cost, and total cost lines. The graph should also show break even point. (b) Using appropriate equations, estimate the break-even point in total units sold and break-even revenue, and (c) the net income for 120,000 units sold.

Problem #5
SuperCool Company manufactures MG1, a mobile game device. The company’s plant has an annual capacity of 50,000 units. SuperCool currently sells 40,000 units at a price of \$105. It has
the following cost structure. Variable manufacturing cost per unit \$45 Fixed manufacturing costs \$800,000 Variable marketing and distribution costs per unit \$10 Fixed marketing and distribution costs \$600,000

Requirements: Consider each requirement independently. In your answer, show both the appropriate graphs and equations.
a. The Marketing Department indicates that decreasing the selling price to \$99 would increase sales to 50,000 units. This strategy will require SupreCool to increase its fixed marketing and distribution costs. Calculate the maximum increases in fixed marketing and distribution costs that will allow SuperCool to reduce the selling price to \$99 and maintain its operating income.
b. The manufacturing Department proposes changes in the manufacturing process to add new features to the MG1 product. These changes will increase fixed manufacturing costs by \$100,000 and variable manufacturing cost per unit by \$2. At its current sales quantity of 40,000 units, compute the minimum selling price that will allow SuperCool to add these new features and maintain its operating income.

### Sample of Solution

Problem # 1

1. It is confusing to think of fixed costs on a per-unit basis. Do you agree? Why or Why not?

Fixed cost is essentially an expense which doesn’t change with the small variations in the volume of activity. Effectively, fixed cost for any activity remains stagnant and have a potency to change in blocks. For Instance, total rent of a room would remain the same, no matter how many students may stay in there. Hence, it can be realized that the total fixed cost has no correlation with the quantity or volume of underlying substance but up to certain extent. Considering the previous example of rent, if the capacity of one room is fully utilized, another room would be rented out while incurring another block of fixed cost, which would effectively remain same up to the new limit. Whereas, fixed cost per unit have converse implications, as it decreases as the number of units contributing to the fixed cost increase.

……

Problem #2

Refer to “Unraveling the mystery of IT costs” to this question. Discuss what results were achieved by the wholesale bank through its cost transparency program in both supply cost controls and demand management.

IT costs although considered for lesser scrutiny but have strategic implications. The wholesale bank has been able to substantially reduce the costs of its operation through its cost transparency program which involved the integration and alignment of IT costs with the ultimate strategy of the bank. Effectively, the cost transparency program achieved three strategic implications which involved accurate consolidation of the business portfolio with IT costs, pragmatic approach towards the IT products consumption, efficiency in resource allocation.

……

Problem #5

SuperCool Company manufactures MG1, a mobile game device. The company’s plant has an annual capacity of 50,000 units. SuperCool currently sells 40,000 units at a price of \$105. It has the following cost structure.

Variable manufacturing cost per unit                                           \$45

Fixed manufacturing costs                                                               \$800,000

Variable marketing and distribution costs per unit                      \$10

Fixed marketing and distribution costs                                          \$600,000

(a)

The Marketing Department indicates that decreasing the selling price to \$99 would increase sales to 50,000 units. This strategy will require SupreCool to increase its fixed marketing and distribution costs. Calculate the maximum increases in fixed marketing and distribution costs that will allow SuperCool to reduce the selling price to \$99 and maintain its operating income.

Solution

Operating Income in normal case = Contribution Margin – Fixed Costs

Operating Income in normal case = ((\$105 – \$55) * 40,000) – \$1400, 000

Operating Income in normal case = \$600,000

Now we need to find the maximum increase in fixed marketing and distribution cost that would allow SuperCool to reduce the selling price to \$99 while maintaining its operating income. However, the fixed manufacturing cost would remain the same in both the cases, as the exceeded volume of production (50,000) is still within the capacity of the plant.

So by using the above given formula

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