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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 companyâ??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
The solution explains two discussion questions relating to costs in manufacturing and increase in operating income by producing more products
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1. The reason is the change in manufacturing setup. In earlier times, most of the manufacturing was labor intensive and so the costs were usually variable - direct material and direct labor. Fixed costs were less in terms of plant and machinery were less due to high labor content.
In the present manufacturing environment, automation has replaced labor and this has led to an increase in the fixed costs. Most of factories use lot of plant and machinery and so have high depreciation expenses. This has resulted in lowering the proportion of variable costs in terms of ...
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