Find effect on semi-variable costs for 10% decrease in the current year sales of Incorporation R compared to last year sales.
Answer to Problem 1STQ
a) Decrease in total, but increase as a percentage of net sales.
Explanation of Solution
Semi-variable costs: These costs are fixed up to certain level of activity; over that level costs will change according to the change in the activity (less proportionate to that activity).
Total semi variable costs will increase/(decrease) along with the increase/(decrease) in the activity due to variable cost element. But semi variable costs percentage will increase less than proportionate to the increase / (decrease) in the activity because of fixed cost element.
For example:
Assume that the last year sales are $100,000 and semi variable cost are $20,000 (50% fixed, that is $10,000 variable component and $10,000 is the fixed component). Percentage of sales for semi-variable costs is 20%
During the current year, 10% sales are decreased when compared to the last year. Then, the current year sales are $90,000
The above explanation is matching with the option (a) Decrease in total, but increase as a percentage of net sales. Thus, option (a) is the suitable answer. Options (b), (c), and (d) are incorrect answers.
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