Manufacturing Companies and Higher Fixed Costs
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1. Over the past few decades, the cost structure of manufacturing companies has shifted. In the early 1900s, direct material costs were substantial while fixed costs represented a small fraction of total manufacturing costs. However, the cost structure has reversed and now fixed costs make up the majority of total manufacturing costs. What caused this to happen? What would explain the drastic change in cost structure?
2. Explain how making more products that can be sold in a period can increase a company's operating income. Should this tactic be used to increase operating income? Would this happen in service companies or only manufacturing companies? Explain.
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Solution Summary
This solution discusses changes to the cost structure of manufacturing companies. It also discusses how variable and fixed costs affect operating income and provides a detailed example, with numbers, in order to demonstrate this. 323 words.
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1. Over the past few decades, the cost structure of manufacturing companies has shifted. In the early 1900s, direct material costs were substantial while fixed costs represented a small fraction of total manufacturing costs. However, the cost structure has reversed and now fixed costs make up the majority of total manufacturing costs. What caused this to happen? What would explain the drastic change in cost structure?
Previously, in the cost structure of the manufacturing companies, direct materials were substantial in the total manufacturing costs. However, now a day, fixed costs constitute major portion of the total manufacturing costs. It is because the manufacturing process is fully mechanized and ...
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