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Cost behaviour and operating leverage help with planning

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In regards to managerial accounting, how does cost behaviour and operating leverage help with the planning, operating and monitoring of activity in business?

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Understanding cost behavior is fundamental to managing a business. Serious errors can occur when firms do not understand how their costs move and the split between fixed and variable costs (operating leverage). The split between the cost patterns impacts most other decisions and the firm's profitability.

Variable costs are incremental costs, costs that increase when activity goes up or decreases when costs go down. All the special decisions rely on a clear understanding of which costs are variable, and thus incremental. Variable costs are budgeted differently than fixed costs, relying on a forecast of demand and activity to discern the budget level. Variable costs are treated differently during performance evaluation because performance is measure at ...

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Cost Behavior, Operating Leverage, and Profitability Analysis. Cost Accumulation, Tracing, and Allocation.

Problem #1
Assume that Sony and Microsoft both plan to introduce a new hand-held video game. Sony plans to use a heavily automated production process to produce its product while Microsoft plans to use a labor-intensive production process. The following revenue and cost relationships are provided:
(**Please see the attachment for the full chart.)

Required:
a) Compute the contribution margin per unit for each company.
b) Prepare a contribution income statement for each company assuming each company sells 8,000 units.
c) Compute each firm's net income if the number of units sold increases by 10%
d) Which firm will have more stable profits when sales change? Why?

Problem #2
Morris Company makes one product, and it expects to incur a total of $400,000 in indirect (overhead) costs during 2007. Production of the product for the year is expected to be:
(**Please see the attachment for the full chart.)

Required:
a) Calculate a predetermined overhead rate based on the number of units of product expected to be made during 2007.
b) Assuming that direct materials and direct labor costs are $8 and $6, respectively, determine the total cost per unit using the overhead rate you calculated in part a).

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