6 1 if a per unit cost remains constant over a wide range of volume the cost is most likely a Variable Cost the cost per unit decreases as volume increases for the cost behavior of fixed costs and mixed costs Variable cost total costs increase and the per unit costs remain constant as volume increases Y VX Fixed Cost total costs stay the same and the per unit costs decrease as the volume increases Y F Mixed cost Total costs are not constant and the per unit costs are not constant as volume increases Y VX F Each equation F Total Fixed costs V variable cost per unit of activity x volume of activity y total costs Variable cost per Garment total variable costs volume Total fixed costs fixed cost per garment volume total predicted costs avg cost per garment of highest volume volume then subtract from Variable cost slope change in cost change in volume fixed cost total operating cost total variable cost total variable costs variable costs per unit machine hours units total fixed costs total operating cost total variable cost total operating costs variable cost per unit units machine hours fixed costs total cost units avg cost per unit Glue Variable quality inspector salary fixed depreciation on equipment fixed crossover relays variable 6 4 6 5 Regression analysis generally more accurate than high low all data points used in calculation method is objective The R2 generated by regression analysis is a measure of how well the regression analysis cost equation fits the data difference between variable costing and absorption costing is in treatment of fixed manufacturing overhead costs If low volume data point is slightly high and the high volume point is slightly low high low line will be flatter R square ranges from 0 1 if the value is one the data points fall in straight line Account analysis classify each general account as variable fixed or mixed cost used at managers judgment Total variable costs change as cost driver volume changes y axis total costs x axis volume of activity committed fixed costs rent taxes building dep because the organization is locked into these costs R square how well line fits the data Average cost per unit shouldn t predict total costs changes as volume changes Mixed costs total changes when volume changes but not in direct proportion to that change in volume Fixed cost per unit Total cost variable costs fixed costs is inversely related to the volume of activity 6 6 When inventories decline operating income under variable costing is higher than operating income under absorption costing Sales cost of goods sold purchase price units sold sales revenue sale price units sold commission expense sales revenue commission rate contribution margin sales revenue variable expenses Variable costs of good sold total variable costs per unit of units variable costs of good sold per unit absorption cost of good sold per unit fixed MOH per unit variable operating expense variable op expense per unit sold of units costs of good sold total variable costs per unit fixed manufacturing cost per unit of units total operating expense units sold variable operating expenses per unit sold fixed operating expense Absorption cost of good sold per unit absorption cost of good sold of units sold difference in operating income change in inventory level in units fixed MOH per unit projected operating income Loss under variable costing operating income under absorption difference in op income 7 1 If a company sells one unit above break even sales volume operating income will equal unit contribution margin sale price per unit variable cost per unit contribution margin per unit sales price per unit Contribution margin per unit contribution margin ratio operating income total contribution margin fixed expenses increase in operating income contribution margin per passenger additional units sold Variable expense rate variable expenses sales variable expenses sales variable expense rate Breakeven sales in dollars fixed expenses operating income contribution margin ratio 7 2 How is unit sales volume necessary to reach a target profit calculated Fixed expenses target profit unit contr margin Number of units to be sold to reach target profit fixed expenses target profit unit contribution margin 7 3 Breakeven point on a CVP graph is Intersection of sales revenue and total expenses If sales price of a product increases the breakeven point will decrease Fixed expenses sales in dollars contribution margin ratio operating income 7 4 target profit analysis is used to calculate the sales volume that is needed to earn a specific amount of net operating income Shift in sales from a product with high contr margin ratio toward one with low contr margin ratio then breakeven pnt will increase simple average contribution margin total contribution margin for both tickets number of options breakeven point for each product breakeven points in units product lines proportion 7 5 If the degree of operating leverage is then a 2 change in the number of units sold should result in a 6 change in operatin income Margin of safety is the excess of expected sales over breakeven sales Margin of safety in units expected sales in units breakeven sales in units margin of safety as a percentage of sales margin of safety in dollars expected sales in dollars Operating leverage factor contribution margin operating income change in operating income change in volume operating leverage factor contribution margin sales contribution margin in units contribution margin expected posters sold sales price variable cost 8 1 in making short term decisions you should separate variable from fixed costs when making decisions managers should consider revenues that differ between alternatives sunk costs irrelevant to business decisions variable selling costs not relevant fixed selling costs relevant book value on old machine not relevant repairs on old machine relevant cost per pound of hamburger not relevant 8 2 8 3 when companies are price setters their products and services tend to be unique when pricing product or service they must consider all costs Desired profit assets rate of return amazon deciding which product line to emphasize they should look at highest contribution margin per unit of constraining factor