What is cost stickiness? Why do managers need to be aware of cost stickiness?
Variable cost and contribution margin have an inverse connection.
When the ratio of increase in cost due to increased sales is higher than the ratio of decrease in cost to reduce in sales is known as cost stickiness.
Due to cost stickiness, costs can behave differently than expected from their CVP analysis; that’s why managers need to be aware of cost stickiness.
Use the following information to complete Short Exercises S20-10 through S20-15.
Funday Park competes with Cool World by providing a variety of rides. Funday Park sells tickets at $70 per person as a one-day entrance fee. Variable costs are $42 per person, and fixed costs are $170,800 per month.
S20-14 Computing margin of safety
Refer to the original information (ignoring the changes considered in Short Exercises S20-12 and S20-13). If Funday Park expects to sell 8,100 tickets, compute the margin of safety in tickets and in sales dollars.
Identifying variable, fixed, and mixed costs Holly’s Day Care has been in operation for several years. Identify each cost as variable (V), fixed (F), or mixed (M), relative to number of students enrolled.
1. Building rent.
3. Compensation of the office manager, who receives a salary plus a bonus based on number of students enrolled.
4. Afternoon snacks.
5. Lawn service contract at $200 per month.
6. Holly’s salary.
7. Wages of afterschool employees.
8. Drawing paper for students’ artwork.
9. Straight-line depreciation on furniture and playground equipment.
10. Fee paid to security company for monthly service.
Analyzing a cost-volume-profit graph
Nolan Rouse is considering starting a Web-based educational business, e-Prep MBA. He plans to offer a short-course review of accounting for students entering MBA programs. The materials would be available on a password-protected Web site; students would complete the course through self-study. Rouse would have to grade the course assignments, but most of the work would be in developing the course materials, setting up the site, and marketing. Unfortunately, Rouse’s hard drive crashed before he finished his financial analysis. However, he did recover the following partial CVP chart:
1. Label each axis, the sales revenue line, the total costs line, the fixed costs line, the operating income area, and the breakeven point.
2. If Rouse attracts 300 students to take the course, will the venture be profitable? Explain your answer.
3. What are the breakeven sales in students and dollars?
94% of StudySmarter users get better grades.Sign up for free