Quiz 2: The Nature of Costs

Business

There are two types of cost found in accounting system Fixed cost and Variable cost. Fixed costs does not change with an increase and decrease in the amount of goods and services produced or sold. A fixed cost remains constant in total for a period with respect of wide changes in the total activity and volume. Variable costs change in proportion with an increase and decrease in the amount of goods and services produced or sold. The variable cost changes in total for a period with respect of wide changes in the total activity and volume. Operating income is the difference between the contribution margin and fixed cost. Contribution margin is the difference between the total revenue and total variable cost. It is an indicator which shows the changes in operating income which change in number of unit sold.The D company runs the cafeteria for its employees. The operating income is calculated as following: img Formulas used in above calculations are as following: img When the cafeteria is replaced with vending machine the sales are 40 % more than the current sale. So the new sales are calculated as following: img With the vending machine all the cost related to the cafe will be avoided that is zero. D company share of sales is 16%. D Company share is calculated as following: img Increase in operating income is calculated as following: img When the D Company replaces the cafeteria with vending machine its operating income will change by $188.

An opportunity costs is the probable advantage that is loss when the company decides to take up the next best alternative. Among two alternatives it is the loss of one alternative when the second best alternative is chosen. An opportunity costs is not included in the books of account because they are costs related to not following certain alternatives. These costs help management in decision making and choosing the best alternative in the given scenario. Opportunity cost can be resolute only inside the framework of an explicit decision. It can be calculated after specifying all alternative actions. Yes opportunity cost can be negative. Example of a negative opportunity cost is as following. Mr. A owns a big house with a beautiful tennis ground. He no longer wants a tennis ground and decides to change it into lawn. The transformation of tennis ground into a lawn is $2000. Mr. X is searching a house with tennis ground. By selling the house to X he can save $2,000 of the transformation. So the decision to sell house includes a negative opportunity cost of $2,000.

An opportunity costs is the probable advantage that is loss when the company decides to take up the next best alternative. Among two alternatives it is the loss of one alternative when the second best alternative is chosen. An opportunity costs is not included in the books of account because they are costs related to not following certain alternatives. These costs help management in decision making and choosing the best alternative in the given scenario. Opportunity cost can be resolute only inside the framework of a explicit decision. It can be calculated after specifying all alternative actions. In the above quote they opportunity cost is not taken into account. They have ignored the opportunity cost. The listeners have to sacrifice the normal planned programs for the fund raising pledge. If NPR will consider the opportunity cost campaign will be very costly.