Not Too Much Water, LLC, a manufacturer of orchid pots, incurs only fixed and variable costs in its operations. When 15,000 orchid pots are produced, the company’s managerial accountant noted a fixed cost per pot of $7.50 and a variable cost per pot of $8.35. If production is expected to increase, which of the following statements is TRUE? Select one: a. The fixed cost per pot will not change; the variable cost per pot will decrease. b. Total fixed costs will decrease; the variable cost per pot will not change. c. The fixed cost per pot will decrease; the variable cost per pot will increase. d. Total fixed costs will remain unchanged; total variable costs will increase. e. More than one of the above statements is true.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Not Too Much Water, LLC, a manufacturer of orchid pots, incurs only fixed and variable costs in its operations. When 15,000 orchid pots are produced, the company’s
If production is expected to increase, which of the following statements is TRUE?
Variable cost means the cost which vary with the level of output and fixed cost means the cost which remain fixed what ever may be the level of output.
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