Read: Principles of Accounting, Chapter 18: Cost-Volume-Profit and Business Scalability:
The following are different categories of costs: Variable, Fixed (committed), Fixed (discretionary), and Mixed.Identify what type of cost is best represented by the following examples of costs and briefly explain why. The answer to the first one, Rent, is provided as an example: Rent is a fixed, committed cost because it does not change due to differences in activity levels. In other words, rent is always a cost that will be due regardless of business activity level. It is generally considered a committed cost because once you sign the lease you are committed to pay rent for the life of the lease.
- Rent: Answer explained above
- Property taxes on land and building
- Billboard advertising campaign
- Raw materials used in the manufacturing process
- Employee picnic with band, food, and door prizes
Greg Morrison recently graduated from construction engineering school. He is considering opening his own construction business providing module housing. Providing module homes is a high-fixed cost business, as it requires considerable expenditures for facilities, labor, and equipment, no matter how many families are served. Assume the annual fixed cost of operations is $800,000. Further assume that the only significant variable cost relates to the module homes, themselves. An average module home costs $12,000. Greg’s banker has asked a variety of questions in contemplation of providing a loan for this business:
- (a) If the average family is charged $18,000 for installation of a module home, how many families must be served to clear the break-even point?
- (b) If the banker believes Greg will only serve 100 families during the first year in business, how much will the business lose during its first year of operation?
- (c) If Greg believes his profits will be at least $100,000 during the first year, how much is he anticipating for total revenue?
- (d) The banker has suggested that Greg can reduce his fixed costs by $150,000 if he will not buy any vehicles. Greg can instead rent vehicles as needed. The variable cost of renting is $700 per family served. Will this suggestion help Greg reach the break-even point sooner?
For this week’s reflection, please write three complete and well-composed paragraphs (in your own words) in which you use, as an example, a company that operates in Grenada west indies. Describe what business it is in and some of the costs the company incurs. This is very similar to last week’s Learning Journal assignment.This week, categorize the costs you identified as fixed costs or variable costs. Cite references in apa format.