Management Accounting (MGM220)

Session Assignments
(Session 4 & 5)

for

PROF. GERARDO AGULTO JR.

Submitted by

RODERICK D. VEGA
(201640188)

On
06 Oct 2018
Saturday
8. “My variable costs are $2 per unit. If I want to increase production from
100,000 units to 150,000 units, my total cost should go up by only
$100,000”. Comment.
Ans. This is only true that total cost should only goes up to $100,000 based
on the assumption of a $2/unit variable cost and an increase production
from 100,000 units to 150,000 units over a short run period.
The equation below shows the total cost could only go up to $100,000 given
the condition stated above where the fixed cost remain unchanged over the
relevant range of activity on a short run period.
Total Cost (new) = Vc x = $2 (150,000) + Fixed Cost
= $ 300,000 + Fixed Cost
Total Cost (old) = Vc x’ = $2 (100,000) + Fixed Cost
= $ 200,000 + Fixed Cost

Total Cost (increased) = total cost (new) – total cost (old) = $ 100,000.00
However, outside the relevant range where fixed cost will be assumed to
change, the total cost may go up more than $100,000. Say fixed cost
increases to additional $20,000.
The total Cost (new) = Vcx = $ 300,000 + (Fixed Cost + $20,000)
Total cost (old) = $ 200,000 + Fixed Cost
Total Cost (increased) = total cost (new) – total cost (old)
= 320,000 – 200,000
Total Cost (increased) = $120,000

12. When estimating fixed and variable costs, it is possible to have an

equation with a negative intercept. Does this mean that a zero production the
company has a negative fixed costs?
Ans. A negative fixed cost may appear in the determination of variable and
fixed portions of a mixed costa, (1) the cost of the highest level of activity and
(2) the cost of lowest level of activity using the high low method. High low
method is a technique that is used to compute the variable cost rate and total
amount of fixed cost. However, resulting for a negative fixed cost calculation
is not realistic. A negative intercept also appears on the Profit-Volume Graph
which represents a profit loss below the break-even point line.
A zero production does not mean a negative fixed cost. A firm may
discontinue or temporarily to operate but a firm has a capacity cost known as
committed costs, where it continues to incur a fixed amounts if the firm carries
out operations at any level. A capacity cost is a type of fixed costs which
provide a firm with the capacity to produce or sell or both. To state an
example, an airline flying from its origin to its destination incurred fixed cost
such as salary, flight staff, fuel, and maintenance cost whether the aircraft is
empty or full of passengers.

10. If companies that are operating below the break-even point cannot raise
prices, what must they do to break even?
Ans. Companies operating below break-even point and cannot raise prices
may decrease its fixed cost while keeping maintaining the variable cost to a
minimum. It can be done using a sensitivity analysis. This means that a firm
may decrease the number of workers he hired, reduce wages, reduce the
machine or equipment operation which may reduce consumption of electricity,
and any other means to decrease the firm’s fixed cost. This condition may
only be applied on a relevant range over a short run period where the cost of
behaviors (fixed cost and variable) are consistent. Variable cost per unit
varies as the activity varies while fixed cost remain unchanged.