For Professor Ryan Only
lken82
wk4_dq_and_participation.docxNeed roughly 150 words for each below
DQ #1: WHAT IS THE DIFFERENCE BETWEEN FIXED AND VARIABLE COSTS?
DQ # 2: CAN YOU DEFINE "CONTRIBUTION MARGIN"? WHY IS THIS IMPORTANT?
Class Participation
Need 6 responses to any of the ones below, please respond in red font so I know which post you are replying too
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· WEEK FOUR - DISCUSSION QUESTION # 2
Re: WEEK FOUR - DISCUSSION QUESTION # 2
Sep 09, 2014, 10:06 AM
Contribution margin is a cost concept for a company to determine how profitable a individual product is. Contribution margin refers to a per unit measure of that particular gross operating margin (product price minus total variable cost).
If a manager determines a particular product and its contribution margin happens to be lower that other products in the company's product line, managers can then use these figures to determine whether variable costs can be reduces, increase product prices or do aways with that product, to then find other alternatives that could achieve a higher contribution margin.
· Comment on Sep 09, 2014, 11:13 AM
Re: WEEK FOUR - DISCUSSION QUESTION # 2
posted by JOHN RUIZ
Sep 09, 2014, 11:13 AM
In simple terms Contribution Margin is a system that allows a company to determine the profitability of a particular individual product. Using this system a company is a able to establish a products gross operating margin per unit measure through a simple calculation of subtracting the individual units total variable cost. An example of this would be a manger trying to determine is a product can be more profitable by either determining if a individual products variable cost can either be reduced or if the products end price can be increased. If either option is not attractive due to the production cost verses selling price ratio, a manager can then decide if it would be best to find a sell another variation of the product with a higher level of a contribution margin or if the product should just be scrapped all together.
· Comment on Sep 10, 2014, 7:53 AM
Re: WEEK FOUR - DISCUSSION QUESTION # 2
posted by ANDREW WAREING
Sep 10, 2014, 7:53 AM
The contribution margin is the amount of revenue left over after deducting all of the variable costs. In most income statements the variable and fixed costs are not differentiated and the contribution margin is not available. In addition the contribution margin is often expressed as a total and a per unit amount (Kimmel, Weygandt, & Kieso, 2011).
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2011). Accounting tools for business decision making (4th ed.). : John Wiley & Sons Inc.
· Comment on Sep 10, 2014, 3:32 PM
Re: WEEK FOUR - DISCUSSION QUESTION # 2
posted by JASON YORGENSEN
Sep 10, 2014, 3:32 PM
Class,
The contribution margin is evaluated as the selling price minus the variable costs. This is important to know because it can determine how much material a business needs to purchase. Businesses have to be able to analyze this costs while at the same time evaluating trends. At any time a business owner wants to help their customers. This requires them to have enough materials to create a product. Having to much or not enough of a product can harm the business. Understanding what the contribution margin may be in a product and what the business trends are will determine if the business needs to buy in bulk. Purchasing materials in bulk can be cost effective if the product that is being sold is moving. If it is not and the business is holding materials than it can cost the business a lot of money.
Jason Yorgensen
· Comment on Sep 11, 2014, 3:18 PM
Re: WEEK FOUR - DISCUSSION QUESTION # 2
posted by Mark Pollack
Sep 11, 2014, 3:18 PM
The calculation is the gross income of an individual product minus all the variable costs. This important because the variable costs are usually identified with making that individual product while fixed covers all products made. The data will provide the decision makers insight into the ROI for each product therefore determining if changes need to be implemented.
· Comment on Sep 11, 2014, 9:14 PM
Re: WEEK FOUR - DISCUSSION QUESTION # 2
posted by KEITH MAJORS
Sep 11, 2014, 9:14 PM
The contribution margin is essentially measuring how much money will be left over after accounting for costs. The money left over after accounting for the costs a company incurs will be applied to net income.
The contribution margin can measure individual items or can be viewed as a ratio. The per unit measurement will calculate the revenue remaining per unit after variable costs have been deducted. The ratio is the percentage of each dollar that will contribute to net income.
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WEEK FOUR - DISCUSSION QUESTION # 1
created by Linda Moore
Last updatedSep 11, 2014, 9:07 PM
11
· Comment on Aug 19, 2014, 1:05 AM
WEEK FOUR - DISCUSSION QUESTION # 1
posted by Linda Moore
Aug 19, 2014, 1:05 AM
· Comment on Sep 09, 2014, 9:58 AM
Re: WEEK FOUR - DISCUSSION QUESTION # 1
posted by DONALD DENNIS
Sep 09, 2014, 9:58 AM
All costs that companies face are those of fixed costs as well as variable costs.
Fixed costs are consistent costs through relevant production of an item or service. Fixed costs can also be considered sunk costs. These costs could include such things as rent obligations or machinery that keep the business operating as it should. Variable costs on the other hand are cost that increase or decrease depending the need for such. These could include employee wages, utilities or the materials used to make those consumer items.
Some companies are in a particular industry where they may have both fixed and variable costs. An example here could be with electricity. Usage may increase, with production, but if nothing is being produced, charges could still apply to maintain that electricity at any given time.
· Comment on Sep 09, 2014, 12:56 PM
Re: WEEK FOUR - DISCUSSION QUESTION # 1
posted by JOHN RUIZ
Sep 09, 2014, 12:56 PM
Hello Donald,
I really liked your example of variable costs of utilities. There are so many different aspects of business that play a significant factor in a companies costs when it comes to utilities. Everything from machinery to employee restroom usage can play a significant factor in the variability of utility usage. Most corporations do all that they can to reduce utility costs by install energy efficient appliances, windows, and lights. It is additionally a cost of business that almost seems like it is more of a fixed cost than a variable cost as certain aspects of business require constant utility usage.
· Comment on Sep 09, 2014, 12:47 PM
Re: WEEK FOUR - DISCUSSION QUESTION # 1
posted by JOHN RUIZ
Sep 09, 2014, 12:47 PM
When you break down the total cost of a production, you get a variable costs and a fixed cost. To gain a better understanding of the differences between variable costs and fixed costs you need to identify what they are and how they are applied to the costs of a product.
Variable costs are an variable expense that changes depending on production output. The larger a production volume becomes, the higher the variable cost rises. If there is no production happen at all, then there is no added variable cost. Examples of variable costs are direct costs of materials and direct labor costs.
Fixed costs vary from variable costs as they are costs that have to be paid whether a company is selling or producing or not. Fixed costs exist in all levels of business from small mom and pop shops to major corporations. An example of a fixed cost would be leases/mortgages/rent and salaried employees. These costs occur whether the doors are opened or closed as they are guaranteed expenses as long as they are in your possession.
· Comment on Sep 11, 2014, 7:24 AM
Re: WEEK FOUR - DISCUSSION QUESTION # 1
posted by ANDREW WAREING
Sep 11, 2014, 7:24 AM
Hi John,
airlines are a great example of organizations with huge fixed costs. With airplanes only being made by two manufacturers, Airbus and Boeing and airports being operated as monopolies most airlines make tiny profits with margins as low as 1%. This is despite the incredible increase in flights with passenger kilometers going from zero. six decades ago to more than 5 trillion ("Why Airlines Make Such Meagre Profits", 2014).
Why airlines make such meagre profits. (2014). Retrieved from http://www.economist.com/blogs/economist-explains/2014/02/economist-explains-5
· Comment on Sep 11, 2014, 2:51 PM
Re: WEEK FOUR - DISCUSSION QUESTION # 1
posted by JASON YORGENSEN
Sep 11, 2014, 2:51 PM
Class,
I believe that is a good example as well. It is interesting that many of these airlines only have to buy a limited number of airplanes that need to be purchased over time. This allows them to cut costs in that one area. Once the planes were purchased the main cost is to maintain the planes and provide fuel and other services. The problem with airlines is it can be difficult to judge traffic and when they are going to be busy. This can costs the airlines millions if it's not handled appropriately.
Jason Yorgensen
· Comment on Sep 10, 2014, 7:53 AM
Re: WEEK FOUR - DISCUSSION QUESTION # 1
posted by ANDREW WAREING
Sep 10, 2014, 7:53 AM
Variable costs are in direct proportion to the level of production. They include such factors as direct materials and direct labor. Fixed costs remain the same no matter how much production varies. They include depreciation of equipment, salaries and property taxes (Kimmel, Weygandt, & Kieso, 2011).
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2011). Accounting tools for business decision making (4th ed.). : John Wiley & Sons Inc.
· Comment on Sep 10, 2014, 3:26 PM
Re: WEEK FOUR - DISCUSSION QUESTION # 1
posted by JASON YORGENSEN
Sep 10, 2014, 3:26 PM
There are some differences between fixed and variable costs. With a variable cost the cost of a product rise or fall with the amount of product that is sold. If you are a business like a bakery the more you make the higher the cost for things like flour and sugar. When the business makes more product than they have to continue to purchase causing the costs to become variable. Fixed costs are costs that do not change no matter how good or bad the business does. Things that can be considered fixed costs are salaries for employees or possibly rent on a building. Those costs usually stay the same and will not change with the amount of product that is made. Fixed costs are easier to calculate but can really effect a businesses bottom line especially if the business is not doing well. Variable costs have a smaller effect because when a business does well they are not incurring the same cost as they would if they were not selling product.
Jason Yorgensen
· Comment on Sep 10, 2014, 4:28 PM
Re: WEEK FOUR - DISCUSSION QUESTION # 1
posted by Mark Pollack
Sep 10, 2014, 4:28 PM
Hi Jason, you wrote that your variable costs have a smaller effect on the business. I would say that is not always the case. Take for instance buying medication for a small clinic. Typically you manage those drugs through past sales history. It is a variable cost because each spend is different, but you are projecting the buying habits of your customers. These types of variable costs have a strong and direct effect on your business. The book gives a straightforwards variable cost, but I can tell you from experience that taxes, cost of goods sold, facility maintenance are all subject to your businesses financial impact.
· Comment on Sep 11, 2014, 2:38 PM
Re: WEEK FOUR - DISCUSSION QUESTION # 1
posted by JASON YORGENSEN
Sep 11, 2014, 2:38 PM
Class,
I agree that in this particular situation it can have a large impact. I think anything in the health care field is going to have an increased cost it does not matter is they are variable or not. The cost of medications is on the rise and it can be difficult for one that purchased medications to adjust for those costs. I do believe that in situations like people who own candle stores or sell greeting cards those variable costs can have a smaller impact on the business.
Jason Yorgensen
· Comment on Sep 11, 2014, 2:26 PM
Re: WEEK FOUR - DISCUSSION QUESTION # 1
posted by TIFFANY MINGO
Sep 11, 2014, 2:26 PM
I really like your example of as bakery as something that experiences both types of cost. This is also applied to places like restaurants where they go under because they aren't selling enough of what they put out there. For example they are still buying all the ingredients and using the machines to produce the product of food for the customers but they may not charging the right price and that can also depend on the quality of the food and mass amount of customers they intake. I think variable costs are used more in the food scene as it is constantly changing. You may simply have a smaller customer base all because of something small like the season of year.
· Comment on Sep 11, 2014, 3:14 PM
Re: WEEK FOUR - DISCUSSION QUESTION # 1
posted by Mark Pollack
Sep 11, 2014, 3:14 PM
I like the bakery example. I have watched many cooking shows about ailing restaurants. The key wasn't managing the fixed costs because they (the owners) clearly understood those expenses. Where the business went south was managing variable expenses. Variable expenses play a major role in the profitability of the company.
· Comment on Sep 10, 2014, 4:23 PM
Re: WEEK FOUR - DISCUSSION QUESTION # 1
posted by Mark Pollack
Sep 10, 2014, 4:23 PM
Variable cost directly changes with the activity level of the production or service.
Fixed cost are those that do not change no matter the activity level.
The animal hospital I owned had many foxed and variable costs. Much like the story of the doctor in the beginning of the chapter,we had employees,medical equipment,rent,insurance, veterinary medications,etc. As an owner it was very important to manage my variable costs. I knew my fixed costs well and one may believe that they can manage their variable costs like fixed costs...but you cant. It is so vital for an owner or manager to understand their costs and hedge those when you can.
· Comment on Sep 11, 2014, 9:07 PM
Re: WEEK FOUR - DISCUSSION QUESTION # 1
posted by KEITH MAJORS
Sep 11, 2014, 9:07 PM
Mark,
From what I've ready in your comments in the past, it sounds you had a great grasp of your business operations at the animal hospital. Understanding your costs down to the minute, knowing how to manage fixed and variable costs. Not only fully understanding the difference between variable and fixed costs, but also knowing that the management of variable costs is extremely difficult to do.
Why did you leave the animal hospital? It seems as though you've gained a ton of valuable experience from it.
Knowing that managing variable costs is difficult to do, what did you personally do at the animal hospital to manage your variable costs? What things did you do to manage your fixed costs?
· Comment on Sep 10, 2014, 7:57 PM
Re: WEEK FOUR - DISCUSSION QUESTION # 1
posted by TIFFANY MINGO
Sep 10, 2014, 7:57 PM
Variable costs are an expense that will continually change depending on the variance between the production outputs. If the production goes up we would see a rise in the variable cost and vice versa. This can be applied to the materials and the labor involved in the production process.
Fixed costs are different because they have a set amount no matter how high or low the production amount is. For example a fixed cost would be the set fee put into a contract. They are a form of an expense that has to be paid out regardless of something such as producing poor quality products.
· Comment on Sep 11, 2014, 10:13 AM
posted by DONALD DENNIS
Sep 11, 2014, 10:13 AM
|
Turnover |
$12,000 |
$14,000 |
$16,000 |
|
Variable Costs (50%) |
$6,000 |
$7,000 |
$8,000 |
|
Fixed Costs |
$5,000 |
$5,000 |
$5,000 |
|
Weekly Profit |
$1,000 |
$2,000 |
$3,000 |
If you were to buy a small business for an example with a turnover of $12,000 and profits of $1,000 (8%) and you can increase the turnover to $14,000, the profit margin increases to $2,000 (14%). At a turnover of $16,000 the profit margin increases to $3,000 (19%).
The profit margin has more than doubled even though turnover has only increased by one third. The limit on your growth is simply the capacity of the business. If you can outgrow the capacity, it is time to find a bigger, better building for your business or to have more than one storefront.
· Comment on Sep 11, 2014, 8:54 PM
Re: WEEK FOUR - DISCUSSION QUESTION # 1
posted by KEITH MAJORS
Sep 11, 2014, 8:54 PM
According to our text the difference between fixed and variable costs is that fixed costs remain the same in total regardless of change in activity level and variable costs vary in total directly and proportionately with changes in activity level.
Activity level would be considered the amount of output a company is producing. For a fixed cost, if the level of output increases for a company, the cost will not rise with the increase. For a variable cost, if the level of output increases, the cost will rise accordingly.
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