A company has always used the full cost of its product as the starting point in the pricing of that product. The price set by competitors and the demand for the company's only product, the Widget, have never been predictable. Lately, the company's market share has been increasing as it continues to lower its price, but total revenues have not changed significantly relative to the gain in sales volume. The likely reason for the stability of total revenues is the
Answer(s): C
Fixed costs remain fixed in total at different activity levels. Thus, unit fixed cost will vary inversely with the activity level. The use of full cost pricing results in a lowering of unit fixed cost used as a basis for unit price as sales increase. The consequence is a reduction of the unit sales price (assuming a constant unit profit margin is maintained). Total revenues may remain approximately the same as sales volume increases.
When the number of units manufactured increases, the most significant change in average unit cost will be reflected as
As production increases or decreases, the most significant change in the average unit cost will occur in the fixed (non-variable) cost element. When production increases, then average cost of the non-variable element per unit will decrease because total fixed cost is constant.
Costs that increase as the volume of activity decreases within the relevant range are
Answer(s): A
As production levels decrease, total fixed costs must be allocated over fewer units. This increase in average fixed costs per unit increases total average cost per unit.
Quo Co. rented a building to Hava Fast Food. Each month Quo receives a fixed rental amount plus a variable rental amount based on Hava's sales for that month. As sales increase, so does the variable rental amount but at a reduced rate. Which of the following curves reflects the monthly rentals under the agreement?
Fixed cost remains unchanged within the relevant range for a given period despite fluctuations in activity, but variable costs vary directly with the activity. Because a portion of the rental revenue is a fixed cost, it will never be zero regardless of sales. Because the total variable cost increases at a reduced rate as sales increase, the per-unit variable cost is not fixed. Furthermore, as sales increase overtime1 the rental revenue increases at a diminishing amount as represented by Curve I.
The following data were collected from the records of the shipping department of a company:The cost of shipping supplies is most likely to be a
Variable costs are constant per unit but fluctuate in total with activity or volume (the rate of use of capacity). The cost per unit for shipping supplies is relatively constant at about $5, so this cost is variable.
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