Business: Total Variable Cost Essay

Submitted By 12hoh
Words: 638
Pages: 3
Open Document
1. If Wilkerson were to cut prices, based on contribution margin, to just cover short-term variable costs, what consequences could it experience? (5 marks)

If Wilkerson were to cut costs based on contribution margin, it is actually using variable costing method. Under Variable costing method, products costs such as variable manufacturing costs are capitalized. In contrast, period costs such as fixed costs are expensed. In this particular case, direct material and direct labour are variable costs that will be capitalized. In fact, they are used in calculation of contribution margin that Wilkerson uses to price their products. Therefore, to cover only variable costs, Valve’s total variable cost is $26 per unit; Pump’s total variable cost is $32.5 per unit; Flow controller’s total variable cost is $32 per unit. Comparing to Wilkerson’s current absorption costing method, variable costing will have a lower operating income if the production units exceeds sales units since it’s building up the inventory. On the other hand, variable costing leads to a higher operating income since part of the fixed overhead can no longer be parked on the balance sheet.

In addition, after cutting price to just cover variable costs, the selling price for each product will be $26 per unit for Valves; $32.5 per unit for Pump; $32 per unit for Flow controller. Comparing to target selling price of these products, there is a significant drop in price that actual contribution margin is zero. One implication is that this price cut might gain some market share for Wilkerson in short time that more customers are exposed to Wilkerson’s products. In other words, it works similar to advertising expense. However, Wilkerson is not earning net income since contribution margin is zero. In fact, it is actually losing profit because fixed costs come in as period costs that lead to a negative income figure. From a long run perspective, this is not healthy for Wilkerson and industry over all.
Externally, other competitors may lose more market shares and profit; It is even possible that some of these competitors exist the industry until the new equilibrium of number of firms is reached. The reason is because it is majorly due to superior product quality of Wilkerson’s Valves. In addition, customers are likely purchase Wilkerson’s pumps and flow controllers once they accept its Valves. Another to mention is shareholders in this case. By cutting prices, external shareholders such as creditors and employees may be adversely affected since their interest is closely related to Wilkerson’s net income. In short run, this effect is tolerable.
Show More

Related Documents: Business: Total Variable Cost Essay

Essay on Types Of Business Costs

Start up cost Are ‘one-off’ costs paid for when you start up a new business E.g. School – • School building • whiteboards • Chairs • Tables Running costs Are day-to-day costs paid for to run the business E.g. School – • Paper • Books • Electricity + heating • Food. Start-up costs in Running costs in Business Business • Market research – to assess business potential. • Premises. • Building alterations –Expansion, decorate. • Fixture and fittings –Shelving, floor, toilets. • Furniture and…

Words 1042 - Pages 5

Essay about Analyse the Reasons Why Costs Need to Be Controlled to Budget

Analyse the reasons why costs need to be controlled to budget? Introduction: For this task I will be analysing the advantages and disadvantages about the business that Brad owns which involves transporting business people to and from airports using luxury cars and limousines. Addition to this I will also be explaining what the words budget, fixed, variable and total costs mean. One of the main topics that I will be covering is the fact that if Brad does nothing with his costs what the implication…

Words 1219 - Pages 5

Total Variable Cost Analysis Paper

You are a cost management consultant and you have been asked by a small business owner for business advice. Your client owns a chain of small, local operations that support larger caterers for special events. Your client provides the tents for outside events, the soft drinks and snacks for the children of events, along with floral and other decorative arrangements. This kind of business is extremely competitive, and your client would like to know how far she can lower her prices without losing money…

Words 1193 - Pages 5

Leo's Essay

production levels to maximize profits for an organization or business. The team has also studied how to balance fixed and variable costs and how to apply economic cost concepts in making business decisions. Throughout the reading and discussions, each team member has different areas in which he or she struggled, felt confident, and related to the field he or she works in. Identify production level to maximize profits. When developing a business plan, the company or organization must ensure the plan…

Words 1528 - Pages 7

Management Accounting and Contribution Margin Essay

B: 1. Cost volume profit analysis- calculate breakeven point, contribution margin, fix cost, variable cost, margin cost, net profit High–low method to separate fixed costs from variable costs STEP 1: Calculate the variable cost per unit Variable cost per unit = Change in total cost ÷ Change in volume of activity STEP 2: Calculate the total fixed cost Total fixed cost = Total mixed cost – Total variable cost STEP 3: Create and use an equation to show the behaviour of a mixed cost Total mixed…

Words 708 - Pages 3

Business: Costs and Bright Sparks Essay

‘Bright- Sparks’ like most businesses have to have a start-up and running costs. Cost is were there are two types of costs, start-up and operating. A start-up cost is money which a business has to pay only once for example in ‘Bright Sparks’ these would be machinery, office equipment and safety equipment. Operating costs have to be paid monthly or the business will get shut down. ‘Bright Sparks’ has many operating costs, for example, - Paying employees wages - Utility bills (heating…

Words 366 - Pages 2

Costing Methods Paper1

Costing Methods Paper ACC/561 October 6, 2014 Costing Methods Paper Would it be better to use the variable or absorption costing method, and why? In this case it would be more favorable to use the absorption method because with this method, the company only incorporates the overhead that is allocated to the number of units sold which is 81,400. The variable method calculates fixed overhead as a period expense which is calculated based off the 93,300 units that were produced but only if the absorption…

Words 332 - Pages 2

Notes Chapter 3 Essay

NOTES Cost Structure: the proportion of variable costs and fixed costs in an organization. Variable cost: these costs vary in total directly and proportionately with activity level, but are constant per unit. Activity level or activity base: measure of what causes or drives variable cost. Can be a measure of either inputs or outputs. For many purposes we’ll use output units as the activity base – but not always as time goes on! EXAMPLES: See Exhibit 3-2. Although some variable costs…

Words 909 - Pages 4

Management Accounting Essay example

Introduction In this assignment I will produce financial business plan is made for a person to make a decision if they which to loan me capital for my business. The business is set by me and I have place content in the business in terms of satisfaction towards my customers and displeased customer’s needs. Since I build a new business which is a laddie’s handbag. I need the help of the bank to loan me £70000 which will be useable towards my advertising, rent, and wages, and I decides to pay…

Words 1579 - Pages 7

Unit 3 Task P1 P2 And P3 Essay

operating costs, Variable and fixed costs A start is what occurs when someone starts up a business and it is what the person has to pay before they start their business for example the building for the shop, a delivery van for the business and machinery to make the products. Operating costs are the costs that occur while a business is selling products and using the store for example the costs are gas and electric bills, rent and advertisements. The difference between fixed costs and variable costs are…

Words 490 - Pages 2