The Portable MBA in Finance and Accounting, 3rd Edition

124 Understanding the Numbers

Horngren, Charles, Cost Accounting: A Managerial Emphasis,9th ed. (Upper Saddle
River, NJ: Prentice-Hall, 1998).
Zimmerman, Jerold, Accounting for Decision Making and Control,3rd ed. (New York:
McGraw-Hill, 1999).

NOTES

1. Mixedsimply means that it has both a variable- and a fixed-cost component.
   Mixed costs are very common—note your monthly phone bill or many car rental
   contracts.


2. Economists argue that variable costs should not be represented by linear
   functions, since economies and diseconomies of scale do exist. For instance, price
   discounts are often given if one buys inputs such as paper for book printing in large
   quantities. They are better represented by quadratic functions. Most agree, however,
   that if we are analyzing a narrow enough range the assumption of linearity does not
   lead to material error.


3. This can be expressed in an algebraic equation as follows. Since the indiffer-
   ence point is where the two alternatives are equal:

Solving for xyields:

4. Defining the parameters of a “short-run” decision is often difficult. For this
   special offer, if accepted, will PBS assume that this will be the price in the future?
   Will other customers learn of this offer and expect the same terms? Short-run deci-
   sions often have hidden long-run effects—they should always be scrutinized.


5. In this format, xrepresents required dollar sales volume, not required unit
   sales volume.


6. ABC analysis, which is covered in the following chapter, is one such
   technique.


7. When estimating cost structure from historical data the analyst must first
   ascertain that the structure has not changed during the period being analyzed. If
   Books “ ” Us made major additions to its infrastructure, it would make little sense to
   aggregate the costs pre- and postaddition and consider them to be representative of a
   single cost structure.


8. For this simple example we will assume that there are none of the seasonali-
   ties in the fixed cost one would expect, say, for heating costs during the winter in New
   England. Likewise, we will assume that the variable cost per dollar of revenue is the
   same for all types of books.

R

$$,

$,

$

,

11 100 000

100 000

11

9 091

x

x

=

=

= units

$$$,12xx=− 23 100 000