M3 OAES Assigned Questions Read the Success on the OAES document for full instru

Question

M3 OAES Assigned Questions

Read the Success on the OAES document for full instructions about how to use this system.

Assigned questions for Module 3 are:

Q10-1: Compare fixed, variable, and mixed costs.

Q10-2: What do we mean by a Relevant Range?

Q10-3: A professional services business has fixed costs of €150,000 and variable costs of €15 per hour. How much does average cost change between 12,000 or 15,000 units?

Q10-4: Use the following information to determine the breakeven in units, breakeven in £, the number of units to get close to the Target Profit, and the amount of £ estimated from the unit sensitivity analysis:

Fixed costs= £240,000

Selling price per unit= £18.00

Variable costs per unit= £12.60

Target profit= £120,000

Explanation / Answer

Q10-1: Compare fixed, variable, and mixed costs.

Fixed costs are those costs which remain same for a range of output level. In other words we can say that fixed costs do not change with the change in production level but varaible costs are those costs which change as per level of output. It means that if a firm produce higher number of units then variable costs also will be higher or vice versa. Now let’s see mixed costs; mixed costs are those costs which are combination of both (fixed & variable). In other words we can say that when some portion of the costs remain same at various level of output and some portion change as per change in the level of output, thern such combined costs will be known as mixed costs.

Q10-2: What do we mean by a Relevant Range?

Relevant Range refers towards the range for which costs remain same. For example; a company have a machine which can produce units between 10000 units to 15000 units and costs of the machine is $50000, then relevant range will be between 10000 units to 15000 units because after 15000 units there will be a need of additional fixed costs.

Q10-3: A professional services business has fixed costs of €150,000 and variable costs of €15 per hour. How much does average cost change between 12,000 or 15,000 units?

First of all let’s calculate average fixed cost for 12000 units and 15000 units separately;

Fixed costs

€150000

€150000

Number of units

12000

15000

Avaerage fixed cost

€12.5 per unit

€10 per unit

As we know that variable costs change as per change in the number of units are being produced hence average costs will be change only due to fall in average fixed costs because of increased level of output.

Hence Average cost will be changed (€12.5 – €10) = € 2.5 per unit

Thus it is clear that average cost will be reduced by € 2.5 per unit between 12000 units to 15000 units.

Q10-4:

Break Even in units;

Formula is as follow;

Fixed costs / (Selling price per unit – Variable costs per unit)

Now let’s put the values in the formula;

£240000 / (£18 – £12.60)

= £240000 / £5.40

= 44444.44 Units (Approx.)

Break Even in £;

Formula is as follow;

(Fixed costs * Selling price per unit) / (Selling price per unit – Variable costs per unit)

Now let’s put the values in the formula;

(£240000 * £18) / (£18 – £12.60)

= £240000 * £18 / £5.40

= £800000

The number of units to get close to the Target Profit;

Formula is as follow;

(Fixed costs + Target profit )/ (Selling price per unit – Variable costs per unit)

Now let’s put the values in the formula;

(£240000 + £120000 / (£18 – £12.60)

= £360000 / £5.40

= 66666.67 Units (Approx.)

Sensitivity analysis;

As we have already calculated that at 44444.44 units of production company will not generate any amount of profit because it is break even point. So at this level company only can receover its’ fixed and variable costs.

But we have aleady calculated that at 66666.67 units company can earn profit of $120000 that means change in number of units will change in the profitability of the company. That means 50% increase in the number of units sold will generate only 10% of profit.

Profit percentage (120000 / 1200000) = 10%

Percentage change in units (66666.67 – 44444.44) / 44444.44 = 50%

Thus it show that due to high volume of variable costs and due to fixed costs of £240000, net profit will be increased only by 10%

Fixed costs

€150000

€150000

Number of units

12000

15000

Avaerage fixed cost

€12.5 per unit

€10 per unit

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.