Q1. Explain the difference between variable and fixed costs.

Justify the importance of the

distinction between variable and fixed costs in managerial accounting.
There are two main types of cost in businesses when manufacturing their products:
variable costs and fixed costs.
A variable cost is any expense that changes directly based on a company's level of
production and sales. This means that variable costs increase as output ries and decrease
as output falls. Labor, utilities, commissions, and materials are the most popular types of
variable costs.
A fixed cost is any cost that remains constant for a period of time no matter how much a
company produces. These expenses are often independent of the company's specific
businesses and rent, property taxes, insurance, and depreciation are included in it.
As a small business owner, it's important to track and understand how different costs
change with changes in volume and output levels. This division of costs determines the
price of services and support in many other aspects of the overall business strategy. These
costs are also a key component of various pricing methods used by businesses including
job order costing, activity-based costing, and process costing.
Differentiating between variable and fixed costs helps businesses calculate costs such as
mixed cost,… per product to easily figure out how many products to break even or to
achieve desired profit.

Q2. What does the term "breakeven point" mean? Why should a manager care about the
breakeven point, and how can they conduct a breakeven analysis effectively?
The break-even point is the point at which total costs are equal to total revenue. It's
basically the point at which the sales amount needed to cover the costs incured in the
business.
Break-even analysis is a calculation that finds out how much product must be sold in the
period of time to make a profit and helps entrepreneurs come up with a pricing strategy
that not only covers costs, but ensures a gross profit
There are two basic break-even point formulas to caculate break-even point.
First one is how to calculate a BE point based on units: Divide fixed costs by sales per
unit minus variable costs per unit
- BE point in Units = Fixed costs / (Price – Variable cost per unit)
Second one is how to calculate a BE point based on sales dollars: Divide fixed costs by
CM Ratio
- BE point in Units = Fixed costs / CM Ratio
- CM Ratio = (Price – Varisable cost per unit) / Price

Q3. In 2021, Toan and Khang opened the MT Restaurant. They rented a building,
purchased equipment, and hired two full-time employees on a fixed monthly salary basis.
Utilities and other operating expenses remain relatively consistent month after month.
The business has grown significantly over the last two years, with average monthly sales
increasing by 1%. This situation pleases both Toan and Khang, but they are perplexed as
to how sales can increase by 1% per month while profits increase even faster. They are
afraid that one day they will discover that their sales are increasing but their profits are
decreasing. Justify why profits have increased more rapidly than sales. In your response,
use the terms variable costs and fixed costs.
According to the information given above, profit has grown faster than selling MT
restaurant MT is in an uptrend and it also has a high proportion of fixed costs and a
DoL( dol= percentage change in profit/ percentage change in sale).
A 1% increase in sales will result in a 1% increase in net operating income. In
conclusion, MT restaurant should increase DOL during the blooming market to maximize
profit

Q4. ABC Company has a high proportion of fixed costs, while XYZ Company has a high
proportion of variable costs. Which company is most vulnerable to a net loss? Justify
your position.
ABC Company is most vulnerable to a net loss.
Operating leverage is a measure of how sensitive net operating income is to percentage
changes in sales.
A company with a larger fixed cost to variable cost ratio is said to be using more
operating leverage. A company with low sales and high profit margins has high
leveraged. On the other hand, a company with high sales volume and lower profit
margins has lower leveraged. The more fixed cost the company invests, the higher the
levrerage is, the more risky for that company.
ABC Company has a higher proportion of fixed costs than XYZ Company, it means ABC
Company uses more operating leverage. ABC Company is more risky than XYZ
Company, but when the market goes up, ABC Company will get more profit than XYZ
Company and vice versa. So that, ABC Company is most vulnerable to a net loss.

Q5. Are relevant revenues and costs the only information that managers require in order
to choose between alternatives when they make decisions? Explanation via examples.
It is false to say that: Relevant revenues and costs are the only information that managers
require in order to choose between alternatives when they make decisions.
Qualitative factors, as well as relevant revenues and relevant costs need to be considered
when selecting among alternatives.
Non-financial information also needs to be considered when managers are in the process
of making a final decision such as: environmental impact, your relationship with your
vendors, diversity in the workplace and social responsibility. Cutting employee benefits
and bonuses can improve your bottom line in the short term, but if it hurts employee
morale and loyalty, it will hurt in the long run.
Q6. How does a manager decide which of three products to manufacture and sell when
each product is manufactured on a single machine with limited capacity?
Fixed costs are usually unaffected in these situations, so the product mix that miximizes
the company’s total contribution margin should ordinarily be selected. A company should
not necessarily promote those products that have the highest unit contribution margins.
Rather, total contribution margin will be maximized by promoting those products or
accepting those orders that provide the highest contribution margin in relation to the
constraining resource.
The product with the highest contribution margin per resource should be produced firstly.
Try to produce it as much as the company can but less than the market demand. Prioritize
production of products in descending order of contribution margin.