ECON 203: Exam 4
53 Cards in this Set
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cost behavior
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how costs behave relative to level of business activity
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fixed costs
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cost does not change regardless of how many units sold
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fixed cost per unit
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not fixed. can change with the number of units sold
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reviewing fixed cost data
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can reduce risk of undertaking an unprofitable venture
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physical leverage
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heavy objects can be moved with little effort
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operating leverage
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used by business managers to magnify smal changes in revenue into dramatic changes in profitability
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productivity
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the lever between revenue + profitability (small % change in revenue = dramatic % change in profitability)
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calculating percentage change in profitability
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(alternative measure - base measure) / base measure = % change
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base measure
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starting point (ex. 3,000 units [base] to 3,300 units [alternative measure])
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risk
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possibility that the sacrifice may not exceed the benefits
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ultimate risk
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fixed cost - represents a commitment to an economic sacrifice (i.e. SPI pays a band X amount then nobody buys tickets)
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reduce risk
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change fixed costs to variable costs
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variable costs per unit
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remain constant regardless of how many sold (no matter how many tickets sold, the ticket cost is still $16)
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shifting from fixed to variable costs
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reduces potential profits. does not offer operating leverage.
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variable costs structure
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produces a proportional relationship between sales and profitability (10% increase/decrease in sales results in corresponding profitability).
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contribution margin
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revenue - variable costs. represents amount available to cover fixed expenses and thereafter provide company profits.
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net income
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contribution margin - fixed cos
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contribution style income statement
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cannot be used for public reporting, widely used internally
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HICO bottling pays a salary of $5,000 month. a salesperson is paid commission, $2 for each product sold The salesperson's cost is:
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variable
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contribution margin income statements
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allow managers to easily measure operating leverage
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magnitude of operating leverage
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contribution margin / net income
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magnitude of operating leverage #
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measures change in profitability ("4x greater change in profitability than a given change in revenue") - neither good nor bad
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fixed cost behavior
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cost per unit inversely changes with change in level of activity
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variable cost behavior
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changes proportionally with volume activity - cost per unit remains fixed at all levels of activity
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mixed costs
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fixed + variable (eg. room rental fixed, refreshments variable)
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relevant range
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when total cost remains the same whether 1 or 100 tickets are sold. the cost is fixed relative to ticket sales
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breaking even
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sales - variable costs - fixed costs = profit (net income)
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contribution margin per unit
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sales price - variable cost per unit = contribution margin per unit
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break even pt in units
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fixed costs / contribution margin per unit
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accuracy
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desirable, not not as important as relevance
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margin of safety
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gap between budgeted sales and sales required to break even. the amount by which actual sales can fall short before the company begins to incur losses
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margin of safety equation
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budgeted cost - break even cost / budgeted cost
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relevant information
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differs among the alternatives, future oriented
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historical costs
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not relevant because they do not differ between alternatives associated with current decisions
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sunk costs
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historical costs. incurred in the past, not relevant for current decisions
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opportunity costs
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sacrifice incurred in order to obtain an alternative opportunity. not cumulative.
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relevance
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independent from cost behavior, context sensitive, does not need to be exact
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quantitative
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deals in facts, measurable
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qualitative
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preference, immesurable
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differential revenue
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when relevant revenue differs among alternatives
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avoidable costs
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costs managers can eliminate by making specific choices
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unit-level costs
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costs incurred each time a company generates one unit of production
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batch-level costs
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increasing/decreasingunits have no effect
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product-level costs
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costs incurred to support specific products - quality inspections, engineering design, obtaining/defending patents
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facility level costs
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support the entire company ("facility-sustaining costs") building rent, landscaping, utilities. cannot be avoided unless the entire company is dissolved
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special order
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company is offered to sell its goods at a price significantly below its normal selling price
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outsourcing
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buying from companies as opposed to producing internally
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vertical integration
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reduced by outsourcing
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low-ball pricing
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lures a manufacturer in, then the supplier raises prices
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certified suppliers
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offer incentives to motivate suppliers to ship high-quality on a timely basis. suppliers + manufacturers work together to minimize costs
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segments
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organizing operations into subcomponents, used to make comparisons among different products/departments/divisions
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segment reports
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show segment revenues and costs. used to determine whether relevant revenues exceed relevant costs.
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equipment replacement decisions
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should be based on profitability analysis rather than physical deterioration
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ECON 203: Test 3