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Automation affecting Cost Structure: Impact fixed variable

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Suppose a company decided to automate a production line. Explain what effects this would have on a company's cost structure using CVP terminology. Could these changes have any possible negative effect on the firm?

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Solution Summary

Your tutorial is 239 words and explains how automation impacts fixed and variable costs, breakeven, margin of safety, degree of operating leverage and contribution margin. The discussion describes how it could be positive or negative.

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Automating a production line shifts costs from direct labor to overhead (equipment). Equipment can be leased increasing rent expense or purchased increasing depreciation expense. Both rent and depreciation would be fixed overhead costs and would likely commit the organizations for many periods.

How would this impact the CVP aspects? This change would increase the contribution margin (lowers direct labor which is a variable cost) and increases the total fixed costs. So, ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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