Locational Break-Even Analysis

Locational Break-Even Analysis is the use of cost-volume analysis to

make an
economic comparison of locaiton
alternatives.
There are three steps to locational break-even analysis
1) Determine the fixed and variable cost for each location
2) Plot the costs for each location, with costs on the vertical axis
of the graph and
annual volume on the horizontal axis.
3) Select the location that has the lowest total cost for the
expected production volume.
The following is an example of how the locational break-even
analysis is done mathematically.
A company is considering three locations for a new plant,
Chicago, New York, and
Atlanta. Study has shown that fixed and variable costs for
each site are as follows:
FIXED COSTS
COSTS
Chicago
New York
Atlanta

$2500.00
$3500.00
$2200.00

VARIABLE
$45 / UNIT
$30 / UNIT
$40 / UNIT

The selling price of the product is $70 and the company wishes
to find a location with an expected volume of 1200 per year.
The equation to be used for each is:
TOTAL COST = FIXED COSTS + VARIABLE COSTS
(VOLUME)

When each is calculated, the total cost for each city is as

follows:
Chicago
New York
Atlanta

$56,500
$39,500
$50,200

Based on these calculations for a volume of 1200 per year,

New York would have the lowest cost and would therefore be
the preferred location.
This example shows how locational break-even analysis provides us
with a location that will yield the lowest cost of doing business.

Breakeven/ Cost-Volume Analysis

Cost-volume analysis is used in several different areas of POM and QM especially

capacity planning and location analysis. Breakeven and cost/volume analysis are
included in nearly every POM textbook. Cost/volume analysis is used to find the point
of indifference between two options based on fixed and variable costs. A breakeven
point is computed in terms of units or dollars. Breakeven is simply a special case of
cost/volume analysis where there is one fixed cost, one variable cost and a revenue
per unit.

Cost-volume analysis

In cost-volume analysis we compare two or more options to determine what option is

least costly at any volume. The costs consist of two types - fixed costs and variable
costs but there may be several individual costs which comprise the fixed costs or the
variable costs In the example below we are indicating that there are 5 different
individual costs and two options.

Data
Cost Type. Each type of cost must be identified as either a fixed cost or a variable cost.
The default is that the first cost in the list is fixed and that all other costs are variable.
These values can be changed by using the usual dropdown box.
Costs. The specific cost for each option gets listed in the two columns in the table.
Volume. If a volume analysis is desired then enter the volume at which this analysis
should be performed. The volume analysis will compute the total cost (revenue) at the
chosen volume. If the volume is 0 then no volume analysis will be performed other
than for the breakeven point. We have asked for a volume analysis at 250 units.

The Cost/Volume or Breakeven Analysis Solution Screen

Solution

The solution screen is very straightforward. In the screen above there are 5 costs with
some of them being fixed and some of them being variable. The program displays the
following four outputs.
Total Fixed Costs. For each of the two options the program takes the fixed costs, sums
them up and lists them below the table. In this example the total fixed costs for option
1 are $1300 (800+500) while the total fixed costs for option 2 are $900 (700+200).
Total Variable Costs. The program identifies the variable costs, sums them up and lists
them. In this example the total variable costs for option 1 are $10 per unit while for
option 2 they are $12 per unit.

Break even point in units. The breakeven point is the difference between the fixed
costs divided by the difference between the variable costs and this is displayed in
units. In the example it is 200 units.
Break even point in dollars. The breakeven point can also be expressed in dollars.
A volume analysis has been performed for a volume of 250 units. The total fixed costs
and total variable costs have been computed for each option and these have been
summed to yield the total cost for each option.
A graph is available as shown below.

Breakeven analysis
Example 2 - Using Breakeven Analysis with prices
One standard type of break even analysis has revenue versus cost.

Data entry for this option is slightly different in that the program creates a column for
costs and a column for revenues. The fixed and variable costs get entered in the cost
column and the revenue per unit is placed in the revenue column.
We have used three types of cost to set up the table. The first is for the fixed cost of
$10,000, the second is for the variable cost of $20 per unit and the third is for the
(variable) revenue of $25 per unit. The program will compute a break-even volume of
2000 units or $50,000 (not shown).
Example 3 - Breakeven point with three options
The break even module can perform a breakeven analysis for two or three options.
Below we demonstrate the output for a 3 option breakeven. Of course, while there are
three breakeven points only two of them are relevant.

MANAGEMENT ACCOUNTING CONCEPTS AND

TECHNIQUES
By Dennis Caplan, University at Albany (State University of New
York)

CHAPTER 17: Cost

Variances
for

Variable and Fixed

Overhead
Chapter Contents:
Cost
variances
for
variable overhead
Cost variances for fixed
overhead
The
fixed
overhead
spending variance
The
fixed
overhead
volume variance
Additional issues related
to the volume variance
Comprehensive example
of fixed overhead variances
Exercises and problems
Cost Variances for Variable
Overhead:
The formulas for splitting the
flexible budget variance for
variable overhead into a price
variance and an efficiency
variance are the same as the
formulas for direct materials and
direct labor explained in Chapter
7. The price variance for
variable overhead is called the
variable overhead spending
variance:
Spending variance = PV = AQ x
(AP SP)
Efficiency variance = EV = SP x
(AQ SQ)

Where AP is the actual overhead

rate used to allocate variable
overhead, and SP is the budgeted
overhead rate. The Qs refer to
the quantity of the allocation base
used to allocate variable
overhead, so that AQ is the actual
quantity of the allocation base
used during the period, and SQ is
the standard quantity of the
allocation base. The standard
quantity of the allocation base is
the amount of the allocation base
that should have been used (i.e.,
would have been budgeted) for
the actual output units produced.
Given the use of the allocation
base in these formulas for the cost
variances for variable overhead,
the meaning of these variances
differs fundamentally from the
interpretation of the variances for
direct materials and direct labor.
Consider a company that allocates
electricity using direct labor as the
allocation base. A negative
variable overhead efficiency
variance does not necessarily
mean that the factory used more
electricity than the flexible budget
quantity of kilowatt hours for the
actual outputs produced. Rather,
the negative variance literally
means that the factory used more
direct labor than the flexible
budget quantity for direct labor. If
there is a cause-and-effect
relationship between the
allocation base and the variable
overhead cost category (i.e., if

more direct labor hours implies

more electricity used), then the
negative efficiency variance
suggests that more electricity was
used than the flexible budget
quantity, but the efficiency
variance does not measure
kilowatts directly.
Similarly, a negative spending
variance for variable overhead
does not necessarily mean that the
cost per kilowatt-hour was higher
than budgeted. Rather, a negative
spending variance for variable
overhead literally states that the
actual overhead rate was higher
than the budgeted overhead rate,
which could be due either to a
higher cost per kilowatt-hour, or
more kilowatt hours used per unit
of the allocation base. Hence,
what one might think should be
included in the efficiency variance
(kilowatt hours required per
direct-labor-hour being higher or
lower than budgeted) actually gets
included as part of the spending
variance.

Cost Variances for Fixed

Overhead:
Whereas the cost variances for
direct materials, direct labor, and
variable overhead all use the same
two formulas, the cost variances
for fixed overhead are different,
and do not use these formulas at
all.

Also, whereas cost variances for

direct materials, direct labor, and
variable overhead can be
calculated for individual products
in a multi-product factory, cost
variances for fixed overhead can
only be calculated for the factory
or facility as a whole. (More
precisely, fixed overhead cost
variances can only be calculated
for the combined operations to
which the resources represented
by the fixed costs apply.)
There are two fixed overhead cost
variances: the spending variance
and the volume variance.

The Fixed Overhead Spending

Variance:
The fixed overhead spending
variance is the difference
between two lump sums:
Actual fixed overhead costs
incurred Budgeted fixed
overhead costs
The fixed overhead spending
variance is also called the fixed
overhead price variance or
the fixed overhead budget
variance.

The Fixed Overhead Volume

Variance:
The fixed overhead volume
variance is also called
the production volume variance,

because this variance is a function

of production volume. The
volume variance attaches a dollar
amount to the difference between
two production levels. The first
production level is the actual
output for the period. The second
production level is the
denominator-level concept in the
budgeted fixed overhead rate,
expressed in units. As discussed in
the previous chapter, there are two
common choices for this
denominator:
(1)
budgeted
production
(2)
factory capacity
The interpretation of the volume
variance depends on which of
these two denominators are used,
but in either case, the production
volume variance is the difference
between budgeted fixed overhead
(a lump sum), and the amount of
fixed overhead that would be
allocated to production under a
standard costing system using this
fixed overhead rate.
The volume variance with
budgeted production in the
denominator of the O/H rate:
First we use budgeted production
to calculate the volume variance.
In this case:
volume

budgeted fixed overhead

budgeted fixed

varianc
e

=(

budgeted production

units produced

overhead

The term in parenthesis equals the

amount of fixed overhead that
would be allocated to production
under a standard costing system,
when budgeted production is the
denominator-level concept.
Since
budgeted fixed
overhead budgeted
production = budgeted overhead
rate
the above expression for the
volume variance is algebraically
equivalent to the following
formula:
volume variance =

(units produced budgeted production) x budgeted overhead rate

This formula for the volume

variance illustrates the statement
above; that the volume variance
attaches a dollar amount to the
difference between two
production levels. In this case, the
two production levels are actual
production and budgeted
production. The interpretation of
the volume variance, when
budgeted production is used in the
denominator of the overhead rate,
is the following. When actual
production is less than budgeted
production, the volume variance

represents the fixed overhead

costs that are not allocated to
product because actual production
is below budget. In this case, the
volume variance is unfavorable.
When actual production is greater
than budgeted production, then
the volume variance represents
the additional fixed overhead
costs that are allocated to product
because actual production exceeds
budget. In this case, the volume
variance is favorable.
The intuition for when the volume
variance is favorable and when it
is unfavorable is the following. If
the company can produce more
units of output using the same
fixed assets (i.e., the resources
that comprise fixed overhead),
then assuming those additional
units can be sold, the company is
more profitable. When fixed
overhead is allocated to
production, this greater
profitability is reflected in a lower
per-unit production cost, because
the same amount of total fixed
overhead is spread over more
units. On the other hand, if fewer
units are produced than planned,
then the same fixed overhead is
spread over fewer units, the perunit production cost is higher, and
the company is less profitable.
This higher or lower profitability
that arises from changes in
production levels is not an artifact
of the accounting system. Even if
the company uses Variable

Costing, and expenses fixed

overhead as a lump-sum period
cost, when the company makes
and sells fewer units than planned
using the same fixed overhead
resources, it really is less
profitable than was budgeted, and
when the company makes and
sells more units than planned
using the same fixed overhead
resources, it really is more
profitable than was budgeted.
The volume variance with
factory
capacity
in
the
denominator of the O/H rate:
Next we use factory capacity to
calculate the volume variance. In
this case:
volume
varianc
e

=(

budgeted fixed overhead

factory capacity

units produced

budgeted fixed
overhead

Since
budgeted fixed
overhead factory
capacity = budgeted
rate

overhead

the above expression for the

volume variance is algebraically
equivalent to the following
formula:
volume variance = (units produced factory capacity) x budgeted overhead rate

The interpretation of the volume

variance, when factory capacity is

used in the denominator of the

overhead rate, is the following.
Actual production is almost
always below capacity. The
volume variance represents the
fixed overhead costs that are not
allocated to product because
actual production is below
capacity. Hence the volume
variance represents the cost of
idle capacity, and this variance is
typically unfavorable. For this
reason, this volume variance is
sometimes called the idle
capacity variance. In the unlikely
event that the factory produces
above capacity (which can occur
if the concept of practical capacity
is used, and actual down-time for
routine maintenance, etc., is less
than expected), then the volume
variance represents the additional
fixed overhead costs that are
allocated to product because
actual production exceeds
capacity. In this case, the volume
variance is favorable.

Additional Issues Related to

the Volume Variance:
Under what circumstances would
a company calculate the volume
variance using budgeted
production as the denominatorlevel concept, and under what
circumstances would a company
use factory capacity as the
denominator-level concept?

The use of budgeted production in

the calculation of the volume
variance attaches a lump sum
benefit or cost to actual
production levels that exceed or
fall short of budgeted production
levels. For this reason, many
companies consider this
calculation of the volume variance
to be an important performance
measure for the factory manager
and marketing managers
responsible for making and
marketing the product.
The use of factory capacity in the
calculation of the volume variance
provides an indication of how low
the per-unit cost can go, if
demand equals or exceeds factory
capacity. If senior management
would like product managers to
make pricing and operating
decisions based on a long-term
expectation that demand for the
product will equal or exceed
factory capacity, even though
current or short-term demand is
below capacity, calculating the
per-unit cost in this manner will
encourage product managers to
take this long-run perspective. For
example, consider the launch of a
new product line in a new factory.
If fixed overhead is allocated
based on budgeted production,
then product managers might feel
pressured to set sales prices that
will cover full product costs at
initially-low production levels,
but these sales prices might be too

high to generate sufficient initial

consumer interest in the product
for a successful product launch.
Another reason to use factory
capacity in the denominator of the
fixed overhead rate, and in the
calculation of the volume
variance, is that doing so isolates
the cost of idle capacity. Often,
the decision to build a factory that
is larger than current demand
warrants is a strategic decision
made at high levels within the
organization. If the fixed
overhead associated with this
factory is allocated based on
budgeted or actual production, the
per-unit cost of every unit
manufactured includes a small
portion of the cost of this strategic
decision, and the cost reports of
factory managers and the product
profitability statements of product
managers are negatively affected
by this unused capacity. Some
companies prefer to isolate the
cost associated with this strategic
decision, and to either show the
cost of idle capacity as separate
line-items on the cost reports and
profit statements of the factory
manager and product managers,
or remove this cost entirely from
these performance reports, and
report it only at the corporate
level.
Allocating fixed overhead using
actual production can provide
managers short-run incentives to

overproduce, because as
production increases, the per-unit
cost decreases. Similarly,
calculating the volume variance
using budgeted production in the
denominator of the overhead rate
can provide managers short-run
incentives to overproduce,
because as production exceeds
budget, the volume variance
becomes increasingly favorable.
For this reason, some companies
choose not to allocate fixed
overhead at all. However, the use
of factory capacity in the
denominator of the fixed overhead
rate accomplishes the same
objective, because it isolates the
volume variance such that the
performance reports of these
managers need not be affected by
it.
We have assumed, throughout this
section, that fixed overhead is
allocated based on units of output.
However, we saw in the chapter
on activity-based costing that
units of production is often a poor
choice of allocation base in a
multi-product factory, and many
companies that use standard
costing systems use allocation
bases that are more sophisticated,
such as direct labor hours or direct
materials dollars. The question
might arise, how does the use of a
different allocation base, such as
direct labor hours, affect the
calculation of the volume
variance? The answer is: Not at

all. Because of the way in which

standard costing systems work,
the amount of fixed overhead that
will be allocated to product does
not depend on the choice of
allocation base.
For example, assume that a oneproduct company budgets two
direct labor hours to make each
unit, and assume that if fixed
overhead is allocated based on
output units, the budgeted fixed
overhead rate is $10 per unit.
Then using direct labor hours as
the allocation base, the budgeted
fixed overhead rate is $5 per
direct labor hour. Because of the
mechanics of standard costing
systems, no matter whether the
$10-per-unit rate is used, or the
$5-per-direct-labor-hour rate is
used, $10 of fixed overhead will
be allocated to every unit
produced, no matter how many
direct labor hours are actually
used per unit. (If this fact is not
obvious to you, refer back to
Chapter 10 on standard costing.)
Therefore, for the purpose of
calculating the volume variance,
we might as well use the easiest
allocation base, which is units-ofoutput.
It is important to recognize that
even though most manufacturing
companies use a standard
costing system, and even though
the calculation of the fixed
overhead volume variance relies

on the concept of standard

costing, companies can calculate
the volume variance even if they
do not use a standard costing
system. In this case, the
calculation is identical to the
discussion above, but the
company will not be able to
obtain the required information
from the cost accounting system
itself, but rather, will need to
make a separate calculation.

Comprehensive Example of
Fixed Overhead Variances:
The Coachman Company makes
pencils. The pencils are sold by
the box. Following is information
about the companys only factory:
Number of boxes
Direct labor hours
Machine hours
Fixed overhead

Budget
10,000
200
500
$40,000

Actual
12,000
250
650
$42,000

The outputs here are boxes of

pencils. The inputs are direct
labor hours and machine hours.
First we calculate a fixed
overhead rate using actual
amounts, and output units as the
allocation base:
$42,000 12,000 boxes =
$3.50 per box.
Using this overhead rate, every
box of pencils is costed at the
variable cost of production plus
$3.50 in allocated fixed overhead.

Capacity
20,000

Next: we calculate a fixed

overhead rate using budgeted
costs, and budgeted output units
as the denominator-level concept:
$40,000 10,000 boxes =
$4.00 per box.
Next: we calculate a fixed
overhead rate using budgeted
costs, and factory capacity as the
denominator-level concept
(expressed in terms of output
units).
$40,000 20,000 boxes =
$2.00 per box.
The advantage of using capacity
in the denominator is that this
denominator-level concept shows
how low the fixed cost per unit
can go, and hence, how low the
total cost per unit can go, as
production increases.
The fixed overhead spending
variance is calculated as follows:
$42,000 actual $40,000
budgeted = $2,000 unfavorable.
Next: we calculate the volume
variance using capacity as the
denominator-level concept:
volume variance = ($2.00
per box x
12,000 boxes) $40,000 =
$16,000 unfavorable

or equivalently:
volume variance = $2.00 per box
x (12,000 boxes 20,000 boxes)
= $16,000 unfavorable
If the company uses a standard
costing system, the amount
of overallocated or underallocated
fixed overhead is the difference
between actual fixed overhead
incurred, and fixed overhead
allocated to product, calculated as
follows:
actual fixed
overhead fixed
allocated

overhead

=
$42,000 ($2.00
per box x 12,000 boxes)
= $42,000 $24,000
$18,000 underallocated

This $18,000 of underallocated

fixed overhead is equal to the sum
of the $2,000 unfavorable fixed
overhead spending variance and
the $16,000 unfavorable volume
variance.
Next: we calculate the volume
variance using budgeted
production as the denominatorlevel concept:
volume variance = ($4.00
per box x 12,000 boxes) $40,0
00 = $8,000 favorable

or equivalently:
volume variance = $4.00 per box
x (12,000 boxes 10,000 boxes)
= $8,000 favorable
If the company uses a standard
costing system, the amount
of overallocated or underallocated
fixed overhead is the difference
between actual fixed overhead
incurred, and fixed overhead
allocated to product, calculated as
follows:
actual fixed
overhead fixed
allocated

overhead

=
$42,000 ($4.00
per box x 12,000 boxes)
= $42,000 $48,000
$6,000 overallocated

This $6,000 of overallocated fixed

overhead is equal to the sum of
the $2,000 unfavorable fixed
overhead spending variance
(which did not change when we
changed the denominator-level
concept from capacity to budgeted
production) and the $8,000
favorable volume variance.
To illustrate that the choice of
allocation base does not affect the
calculation of the volume
variance, we recalculate the
volume variance assuming the

company allocates overhead using

machine hours as the allocation
base and budgeted production as
the denominator-level concept.
The budgeted overhead rate is
now
$40,000 500 machine
hours = $80 per machine hour.
Since the standard for machine
time is one hour for every twenty
boxes (derived from the budget
column in the box at the
beginning of the example), the
standard costing system will
allocate fixed overhead as
follows:
Budgeted overhead rate x
(standard inputs allowed for
actual outputs achieved)
= $80 per machine hour x
(12,000 boxes 20 boxes per
machine hour)
= $80 per machine hour x
600 machine hours = $48,000
And the volume variance is
fixed overhead allocated
to
product budgeted
fixed
overhead
= $48,000 $40,000
$8,000 favorable, as before.

Variable Mfg Overhead: Standard Cost,

Spending Variance, Efficiency
Variance
"Manufacturing overhead costs" refer to any costs within a manufacturing facility other than direct
material and direct labor. Manufacturing overhead includes such things as indirect labor, indirect
materials (such as manufacturing supplies), utilities, quality control, material handling, and
depreciation on the manufacturing equipment and facilities.
"Variable" manufacturing overhead costs will increase in total as output increases. An example is the
cost of the electricity needed to operate the machines that cut and sew the denim. Another example
is the cost of the manufacturing supplies (such as needles and thread) that increase when
production increases. In our example we assume that these variable manufacturing overhead costs
fluctuate in response to the number of direct labor hours. Recall the original estimates made when
DenimWorks was formed:

January 2013
Let's begin by determining the standard cost of variable manufacturing overhead for the good output
that DenimWorks produces in January 2013:

Recall that there were 50 actual direct labor hours in January. Let's assume that the actual cost for
the variable manufacturing overhead (electricity and manufacturing supplies) during January is $90.
Our analysis will look like this:
Variable Manufacturing Overhead Analysis for January 2013:

Notice that for the good output produced in January, the actual cost of variable manufacturing
overhead was $90 and the total standard cost of variable manufacturing overhead cost allowed for
the good output was $84. This unfavorable difference of $6 agrees to the sum of the two variances:

Variable Manufacturing Overhead Efficiency Variance

As the above analysis shows, DenimWorks did not produce the good output efficientlyit used 50
actual direct labor hours instead of the 42 standard direct labor hours allowed.

The additional 8 hours no doubt caused the company to use additional electricity and supplies.
Measured at the originally estimated rate of $2 per direct labor hour, this amounts to $16 (8 hours x
$2). This is referred to as anunfavorable variable manufacturing overhead efficiency variance.
Variable Manufacturing Overhead Spending Variance
In the analysis above, item 2 shows that based on the 50 direct labor hours actually used, electricity
and supplies could reasonably add up to $100 instead of the standard of $84. (If the good output
took 8 actual direct labor hours more than the standard hours to cut and sew the denim, the
company will likely have additional electricity and supplies costs since it is operating the machines
for an additional 8 hours.) We find, however, that the actual cost of the electricity and supplies is $90,
not $100. This $10 favorable variance indicates that the company did not spend the planned $2 per
direct labor hour. (Perhaps electricity rates were lower than the rates anticipated when the standard
costs were established.)
Actual variable manufacturing overhead costs are debited to overhead cost accounts. The credits are
made to accounts such as Accounts Payable. For example:

Another entry records how these overheads are assigned to the product based on standard costs:

As our analysis notes above and these entries illustrate, DenimWorks has an actual variable
manufacturing overhead of $90, but only $84 (the standard amount) was applied to the products.
The $6 difference is "explained" by the two variances:

February 2013
Recall that in February 2013 the company produced 200 large aprons and 100 small aprons. We use
that good output to compute the standard cost of variable manufacturing overhead for February
2013:

Given that there were 75 actual direct labor hours in February and assuming that the actual cost for
the variable manufacturing overhead in February was $156, our analysis will look like this:
Variable Manufacturing Overhead Analysis for February 2013:

The favorable difference between the actual cost of $156 and the standard cost of $160 agrees to
the sum of the two variances:

Actual variable manufacturing overhead costs are debited to overhead cost accounts. The credits are
made to accounts such as Accounts Payable. For example:

Another entry records how these overheads are assigned to the product:

As our analysis notes above and as these entries illustrate, even though DenimWorks had actual
variable manufacturing overhead of $156, the standard amount of $160 was applied to the products.
For the month of February 2013 the company applied more variable manufacturing overhead to its
products than it actually incurred.
We will discuss later how to report the balances in the variance accounts under the heading"What
To Do With Variance Amounts".

Fixed Mfg Overhead: Standard Cost,

Budget Variance, Volume Variance
"Fixed" manufacturing overhead costs remain the same in total even though the volume of
production may increase by a modest amount. For example, the property tax on the manufacturing
facility might be $50,000 per year and it arrives as one tax bill in December. The amount of the

property tax bill was not dependent on the number of units produced or the number of machine
hours that the plant operated. Other examples include the depreciation or rent on production
facilities; salaries of production managers and supervisors; and professional memberships and
training for personnel in the manufacturing area. Although the fixed manufacturing overhead costs
present themselves as large monthly or annual expenses, they are, in reality, a small part of each
product's cost.
DenimWorks has two fixed manufacturing overhead costs:

A small amount of these fixed manufacturing costs must be allocated to each apron produced. This
is known as absorption costing and it explains why some accountants say that each product
must "absorb" a portion of the fixed manufacturing overhead costs.
A simple way to assign or allocate the fixed costs is to base it on things such as direct labor hours,
machine hours, or pounds of direct material. (Accountants realize that this is simplistic; they know
that overhead costs are a result ofor are driven bymany different factors.) Nonetheless, we will
assign the fixed manufacturing overhead costs to the aprons by using the same method we used for
variable manufacturing overheadby using direct labor hours.

Establishing a Predetermined Rate

Companies typically establish a standard fixed manufacturing overhead rate prior to the start of the
year and then use that rate for the full year. Let's assume it is December 2012 and DenimWorks is
developing the standard fixed manufacturing overhead rate to use in 2013. (As mentioned above, we
will assign the fixed manufacturing overhead on the basis of direct labor hours.)
Step 1.
Project/estimate the fixed manufacturing overhead costs for the year 2013.
We indicated above that DenimWorks' only fixed manufacturing overhead costs are rents of $700 per
month (space and equipment) totaling to $8,400 for the year 2013.
Step 2.
Project/estimate the total number of standard direct labor hours that are needed to manufacture your
products during 2013.

We can do that from the information given earlier (and repeated here):

Step 3.
Compute the standard fixed manufacturing rate to be used in 2013.

Note:
One of the reasons a company develops a predetermined annual rate is so that the rate
is uniform throughout the year, even though the number of units manufactured may
fluctuate month by month. For example, if the company used monthly rates, the rate
would be high in the months when few units are manufactured (monthly fixed costs of
$700 100 units produced = $7 per unit) and low when many units are produced
(monthly fixed costs of $700 350 units = $2 per unit).
Fixed Manufacturing Overhead Budget Variance
The difference between the actual amount of fixed manufacturing overhead and
the estimated amount (the amount budgeted when setting the overhead rate prior to the start of the
year) is known as the fixed manufacturing overhead budget variance.
In our example, we budgeted the annual fixed manufacturing overhead at $8,400 (monthly rents of
$700 x 12 months). If DenimWorks pays more than $8,400 for the year, there is an unfavorable
budget variance; if the company pays less than $8,400 for the year, there is a favorable budget
variance.

Fixed Manufacturing Overhead Volume Variance

Recall that the fixed manufacturing overhead (such as the large amount of rent paid at the start of
every month) must be assigned to each apron produced. In other words, each apron must absorb a
small portion of the fixed manufacturing overhead. At DenimWorks, the fixed manufacturing
overhead is assigned to the good output by multiplying the standard rate by the standard hours of
direct labor in each apron. Hopefully, by the end of the year there are enough good aprons produced
to absorb all of the fixed manufacturing overhead.
The fixed manufacturing overhead volume variance compares the amount of fixed manufacturing
overhead budgeted to the amount that was applied to (or absorbed by) the good output. If the
amount applied is less than the amount budgeted, there is an unfavorable volume variancethere
was not enough good output to absorb the budgeted amount of fixed manufacturing overhead. If the
amount applied to the good output is greater than the budgeted amount of fixed manufacturing
overhead, the fixed manufacturing overhead volume variance is favorable. In summary, if
DenimWorks applies more than the amount budgeted, the volume variance is favorable; if it applies
less than the amount budgeted, the volume variance is unfavorable.
Illustration of Fixed Manufacturing Overhead Variances for 2013
Let's assume that in 2013 DenimWorks manufactures (has actual good output of) 5,300 large aprons
and 2,600 small aprons. Let's also assume that the actual fixed manufacturing overhead costs for the
year are $8,700. As we calculated earlier, the standard fixed manufacturing overhead rate is $4 per
standard direct labor hour.
We begin by determining the fixed manufacturing overhead applied to (or absorbed by) the good
output produced in the year 2013:

Our analysis looks like this:

Fixed Manufacturing Overhead Analysis for the Year 2013:

This analysis shows that the actual fixed manufacturing overhead costs are $8,700 and the fixed
manufacturing overhead costs applied to the good output are $8,440. This unfavorable difference of
$260 agrees to the sum of the two variances:

Actual fixed manufacturing overhead costs are debited to overhead cost accounts. The credits are
made to accounts such as Accounts Payable or Cash. For example:

Another entry records how these overheads are assigned to the product:

Assembly Line Balancing

This model is used to balance workloads on an assembly line. Five heuristic rules can
be used for performing the balance. The cycle time can be given explicitly or the
production rate can be given and the program will compute the cycle time. This model
will not split tasks. Task splitting is discussed in more detail in a later section.

The Model

The general framework for assembly line balancing is dictated by the number of tasks
which are to be balanced. These tasks are partially ordered as shown for example in
the precedence diagram below.

Method. The five heuristic rules which can be chosen are:

longest operation time
most following tasks
ranked positional weight
shortest operation time and
least number of following tasks.
NOTE: Ties are broken in an arbitrary fashion if two tasks have the same priority
based on the rule given.
The remaining parameters are:
Cycle time. The cycle time can be given in one of two ways. One way is when the
cycle time is given directly as shown above. While this is the easiest method, it is
more common to determine the cycle time from the demand rate. The cycle time is
converted into the same units as the times for the tasks. (See example 2).
Time unit. The time unit for the tasks is given by this dropdown box. You must choose
either seconds, hours or minutes. Notice that the column heading for the task times
will change as you select different time units.
Task times. The task times are given.

Precedences. Enter the precedences, one per cell. If there are two precedences they
must be entered in two cells. Do not enter 'a,b'. In fact, a comma will not be accepted
Notice that in the precedence list we have typed both 'a' and 'A'. As mentioned
previously, the case of the letters is irrelevant.
Example 1
In this example we have 6 tasks named a through f. The precedence diagram for this
problem appears above. The time to perform each task is above the task. Also, note
that the tasks which are ready at the beginning of the balance are
tasks a and b. Finally, in this first example we use a cycle time of 10.

Solution

The screen above contains the solution to our first example. The solution screen will
always have the same appearance and contain the same information regardless of the
rule which is chosen for the balance. The information is as follows.
The cycle time. The cycle time which was used appears below the balance. This cycle
time was either given directly or was computed. In this example the cycle time was
given directly as 10 seconds.
Station numbers. The station numbers appear in the far left column. They are printed
only for the first task which is loaded into each station. In this example three stations
are required.
Task names. The tasks which are loaded into the station are listed in the second
column. In this example tasks b, e and a are in station 1, tasks d and c are in station 2
and task f is in station 3.
Task times. The length of time for each task appears in this column.
Time left. The length of time which remains at the station is listed in this column. The
last number at each station is of course the idle time at that station. For example, there
is 1 second of idle time at station 1, 1 second at station 2, and 2 seconds at station 3
for a total of 4 seconds of idle time per cycle.
Ready tasks. The tasks which are ready appear here. A ready task is any task which
has had its precedences met. We emphasize this because some books do not list a task
as ready if its time exceeds the time remaining at the station. Also, if the number of
characters in the ready task list is very long you might want to widen that column.
Time allocated. The total time allocated for making each unit is printed. This time is
the product of the number of stations and the cycle time at each station. In this
example we have 3 stations each with a cycle time of 10 seconds for a total work time
of 30 station-seconds.
The time needed to make one unit. This is simply the sum of the task times. In the
example we have 1 + 5 + 2 + 7 + 3 + 8 = 26 seconds.
Idle time. This is the time needed subtracted from the time allocated. This example
has 30 - 26= 4 which matches the 4 seconds found in the column of time left.
The efficiency. Efficiency is defined as the time needed divided by the time allocated.
In this example the efficiency is computed as 26/30 which is .8667

The balance delay. The balance delay is the percentage of wasted time or 100% - the
efficiency. In this example it is 4 (the idle time)/30 or .1333 which is also determined
by 1-.8667.
Minimum theoretical number of stations. This is the total time to make one unit
divided by the cycle time and rounded up to the nearest integer. In this example we
have 26 seconds required to make one unit divided by a 10 second cycle time for an
answer of 2.6. which we round up to 3 stations.
The precedence graph can be displayed as well as a bar graph indicating how much
time was used at each station. These are shown at the end of this section. In addition,
if there is idle time at every station then a note will appear at the top indicating that
the balance can be improved (by reducing the cycle time).
Example 2 - computing the cycle time

Suppose that for the same data we require a production of 2250 units in 7.5 hours.

We assume full minutes and hours and compute the cycle time as
(7.5 hrs/2,250units)*60 min/hr*60 sec/min = 27,000/2,250 = 12 seconds
as illustrated in the balance in the screen below.

Other rules

Most following tasks

A common way to choose tasks is by using the task with the most tasks following.
Notice from the diagram that a has three tasks following it and b has 2 tasks following
it. Therefore the first task scheduled is task a when using this rule.
Ranked positional weight method

The ranked positional weight computes the sum of the task and all tasks which follow.
For example, for task a the ranked positional weight is 1 + 2 + 7 + 8 = 18 while for
task b the weight is 5 + 3 + 8 =16. The task with the largest weight is scheduled first
(if it will fit in the remaining time). Notice that e has a higher ranked positional
weight than c.
Shortest operation time

Another rule that is used sometimes is to give priority to the task which takes the least
amount of time.
Least number of followers

The last rule which is available is the least number of followers.

Example 3 - What to do if longest operation time will not fit

Some books and some software do not apply the longest operation time rule properly.
If the task with the longest time will not fit into the station then the task with the
second longest time should be placed in the station if it will fit.
In the screen below we present data for 8 tasks. Notice that tasks b and c follow
task a.

The balance appears above for a cycle time of 5 seconds. After task a is completed
tasks b and c are ready. Task b is longer but will not fit in the 4 seconds which remain
at station 1. Therefore, task c is inserted into the balance. We caution you that if the
answer in your book differs from the program to check if the book has neglected to
put in the task with the longest operation time that will fit.
Example 4 - Splitting Tasks

If the cycle time is less than the amount of time to perform a specific task then there is
a problem. We perform what is termed task splitting but in reality is actually
duplication. For example, suppose that the cycle time is 2 minutes and a task takes 5
minutes. Then we have the task performed three times (by three people at three
machines independent of one another). The effect is that three units will be done every
5 minutes which is equivalent to one unit every 1.33 minutes which fits into the 2
minute cycle.
Now, the actual way that the three people work may vary. While other programs will
split tasks the assumptions vary from program to program. Rather than making
assumptions we leave it to you to split the tasks by dividing the task time
appropriately.
Suppose that in Example 1 we wanted to use a cycle time of 6 seconds. Then it is
necessary to replicate both tasks d and f since they will not fit in the cycle time. The
approach to use is to solve the problem by dividing the task times by two since this
replication is needed. We present the results below

Graphs

Two different graphs are available. The first is a precedence graph as shown below.
Please note that there may be several different ways to draw a precedence graph.

The second graph is of time used at each station. In a perfect world these would all be
the same (a perfect balance)

MANAGEMENT ACCOUNTING: CONCEPTS AND

TECHNIQUES
By Dennis Caplan
PART 4: DETERMINING THE COST OF INVENTORY
CHAPTER 17: COST VARIANCES FOR VARIABLE AND FIXED
OVERHEAD

Chapter Contents:
Cost Variances for Variable Overhead
Cost Variances for Fixed Overhead
The Fixed Overhead Spending Variance
The Fixed Overhead Volume Variance
Additional Issues Related to the Volume Variance
Comprehensive Example of Fixed Overhead Variances
Cost Variances for Variable Overhead:
The formulas for splitting the flexible budget variance for variable overhead into a
price variance and an efficiency variance are the same as the formulas for direct
materials and direct labor explained in Chapter 6. The price variance for variable
overhead is called the variable overhead spending variance:
Spending variance = PV = AQ x (AP SP)
Efficiency variance = EV = SP x (AQ SQ)
Where AP is the actual overhead rate used to allocate variable overhead, and SP is the
budgeted overhead rate. The Qs refer to the quantity of the allocation base used to
allocate variable overhead, so that AQ is the actual quantity of the allocation base
used during the period, and SQ is the standard quantity of the allocation base. The
standard quantity of the allocation base is the amount of the allocation base that
should have been used (i.e., would have been budgeted) for the actual output units
produced.
Given the use of the allocation base in these formulas for the cost variances for
variable overhead, the meaning of these variances differs fundamentally from the
interpretation of the variances for direct materials and direct labor. Consider a
company that allocates electricity using direct labor as the allocation base. A negative
variable overhead efficiency variance does not necessarily mean that the factory used
more electricity than the flexible budget quantity of kilowatt hours for the actual
outputs produced. Rather, the negative variance literally means that the factory used
more direct labor than the flexible budget quantity for direct labor. If there is a causeand-effect relationship between the allocation base and the variable overhead cost
category (i.e., if more direct labor hours implies more electricity used), then the
negative efficiency variance suggests that more electricity was used than the flexible
budget quantity, but the efficiency variance does not measure kilowatts directly.

Similarly, a negative spending variance for variable overhead does not necessarily
mean that the cost per kilowatt-hour was higher than budgeted. Rather, a negative
spending variance for variable overhead literally states that the actual overhead rate
was higher than the budgeted overhead rate, which could be due either to a higher cost
per kilowatt-hour, or more kilowatt hours used per unit of the allocation base. Hence,
what one might think should be included in the efficiency variance (kilowatt hours
required per direct-labor-hour being higher or lower than budgeted) actually gets
included as part of the spending variance.

Cost Variances for Fixed Overhead:

Whereas the cost variances for direct materials, direct labor, and variable overhead all
use the same two formulas, the cost variances for fixed overhead are different, and do
not use these formulas at all.
Also, whereas cost variances for direct materials, direct labor, and variable overhead
can be calculated for individual products in a multi-product factory, cost variances for
fixed overhead can only be calculated for the factory or facility as a whole. (More
precisely, fixed overhead cost variances can only be calculated for the combined
operations to which the resources represented by the fixed costs apply.)
There are two fixed overhead cost variances: the spending variance and the volume
variance.

The Fixed Overhead Spending Variance:

The fixed overhead spending variance is the difference between two lump sums:
Actual fixed overhead costs incurred Budgeted fixed overhead costs
The fixed overhead spending variance is also called the fixed overhead price
variance or the fixed overhead budget variance.

The Fixed Overhead Volume Variance:

The fixed overhead volume variance is also called the production volume
variance, because this variance is a function of production volume. The volume
variance attaches a dollar amount to the difference between two production levels.
The first production level is the actual output for the period. The second production
level is the denominator-level concept in the budgeted fixed overhead rate, expressed
in units. As discussed in the previous chapter, there are two common choices for this
denominator:

(1) budgeted production

(2) factory capacity
The interpretation of the volume variance depends on which of these two
denominators are used, but in either case, the production volume variance is the
difference between budgeted fixed overhead (a lump sum), and the amount of fixed
overhead that would be allocated to production under a standard costing system using
this fixed overhead rate.
The volume variance with budgeted production in the denominator of the O/H
rate:
First we use budgeted production to calculate the volume variance. In this case:
volume
varianc
e

=(

budgeted fixed overhead

budgeted production

X units produced

budgeted fixed
overhead

The term in parenthesis equals the amount of fixed overhead that would be allocated
to production under a standard costing system, when budgeted production is the
denominator-level concept.
Since
budgeted fixed overhead budgeted production = budgeted overhead
rate
the above expression for the volume variance is algebraically equivalent to the
following formula:
volume =
variance

(units produced budgeted production) x budgeted overhead

rate

This formula for the volume variance illustrates the statement above; that the volume
variance attaches a dollar amount to the difference between two production levels. In
this case, the two production levels are actual production and budgeted production.
The interpretation of the volume variance, when budgeted production is used in the
denominator of the overhead rate, is the following. When actual production is less
than budgeted production, the volume variance represents the fixed overhead costs

that are not allocated to product because actual production is below budget. In this
case, the volume variance is unfavorable. When actual production is greater than
budgeted production, then the volume variance represents the additional fixed
overhead costs that are allocated to product because actual production exceeds budget.
In this case, the volume variance is favorable.
The intuition for when the volume variance is favorable and when it is unfavorable is
the following. If the company can produce more units of output using the same fixed
assets (i.e., the resources that comprise fixed overhead), then assuming those
additional units can be sold, the company is more profitable. When fixed overhead is
allocated to production, this greater profitability is reflected in a lower per-unit
production cost, because the same amount of total fixed overhead is spread over more
units. On the other hand, if fewer units are produced than planned, then the same fixed
overhead is spread over fewer units, the per-unit production cost is higher, and the
company is less profitable. This higher or lower profitability that arises from changes
in production levels is not an artifact of the accounting system. Even if the company
uses Variable Costing, and expenses fixed overhead as a lump-sum period cost, when
the company makes and sells fewer units than planned using the same fixed overhead
resources, it really is less profitable than was budgeted, and when the company makes
and sells more units than planned using the same fixed overhead resources, it really is
more profitable than was budgeted.
The volume variance with factory capacity in the denominator of the O/H rate:
Next we use factory capacity to calculate the volume variance. In this case:
volume
varianc
e

=(

budgeted fixed overhead

factory capacity

units produced

budgeted fixed
overhead

Since
budgeted fixed overhead factory capacity = budgeted overhead rate
the above expression for the volume variance is algebraically equivalent to the
following formula:
volume = (units produced factory capacity) x budgeted overhead rate
variance

The interpretation of the volume variance, when factory capacity is used in the
denominator of the overhead rate, is the following. Actual production is almost always
below capacity. The volume variance represents the fixed overhead costs that are not

allocated to product because actual production is below capacity. Hence the volume
variance represents the cost of idle capacity, and this variance is
typically unfavorable. For this reason, this volume variance is sometimes called
the idle capacity variance. In the unlikely event that the factory produces above
capacity (which can occur if the concept of practical capacity is used, and actual
down-time for routine maintenance, etc., is less than expected), then the volume
variance represents the additional fixed overhead costs that are allocated to product
because actual production exceeds capacity. In this case, the volume variance
is favorable.

Additional Issues Related to the Volume Variance:

Under what circumstances would a company calculate the volume variance using
budgeted production as the denominator-level concept, and under what circumstances
would a company use factory capacity as the denominator-level concept?
The use of budgeted production in the calculation of the volume variance attaches a
lump sum benefit or cost to actual production levels that exceed or fall short of
budgeted production levels. For this reason, many companies consider this calculation
of the volume variance to be an important performance measure for the factory
manager and marketing managers responsible for making and marketing the product.
The use of factory capacity in the calculation of the volume variance provides an
indication of how low the per-unit cost can go, if demand equals or exceeds factory
capacity. If senior management would like product managers to make pricing and
operating decisions based on a long-term expectation that demand for the product will
equal or exceed factory capacity, even though current or short-term demand is below
capacity, calculating the per-unit cost in this manner will encourage product managers
to take this long-run perspective. For example, consider the launch of a new product
line in a new factory. If fixed overhead is allocated based on budgeted production,
then product managers might feel pressured to set sales prices that will cover full
product costs at initially-low production levels, but these sales prices might be too
high to generate sufficient initial consumer interest in the product for a successful
product launch.
Another reason to use factory capacity in the denominator of the fixed overhead rate,
and in the calculation of the volume variance, is that doing so isolates the cost of idle
capacity. Often, the decision to build a factory that is larger than current demand
warrants is a strategic decision made at high levels within the organization. If the
fixed overhead associated with this factory is allocated based on budgeted or actual
production, the per-unit cost of every unit manufactured includes a small portion of

the cost of this strategic decision, and the cost reports of factory managers and the
product profitability statements of product managers are negatively affected by this
unused capacity. Some companies prefer to isolate the cost associated with this
strategic decision, and to either show the cost of idle capacity as separate line-items
on the cost reports and profit statements of the factory manager and product managers,
or remove this cost entirely from these performance reports, and report it only at the
corporate level.
Allocating fixed overhead using actual production can provide managers short-run
incentives to overproduce, because as production increases, the per-unit cost
decreases. Similarly, calculating the volume variance using budgeted production in the
denominator of the overhead rate can provide managers short-run incentives to
overproduce, because as production exceeds budget, the volume variance becomes
increasingly favorable. For this reason, some companies choose not to allocate fixed
overhead at all. However, the use of factory capacity in the denominator of the fixed
overhead rate accomplishes the same objective, because it isolates the volume
variance such that the performance reports of these managers need not be affected by
it.
We have assumed, throughout this section, that fixed overhead is allocated based on
units of output. However, we saw in the chapter on activity-based costing that units of
production is often a poor choice of allocation base in a multi-product factory, and
many companies that use standard costing systems use allocation bases that are more
sophisticated, such as direct labor hours or direct materials dollars. The question
might arise, how does the use of a different allocation base, such as direct labor hours,
affect the calculation of the volume variance? The answer is: Not at all. Because of
the way in which standard costing systems work, the amount of fixed overhead that
will be allocated to product does not depend on the choice of allocation base.
For example, assume that a one-product company budgets two direct labor hours to
make each unit, and assume that if fixed overhead is allocated based on output units,
the budgeted fixed overhead rate is $10 per unit. Then using direct labor hours as the
allocation base, the budgeted fixed overhead rate is $5 per direct labor hour. Because
of the mechanics of standard costing systems, no matter whether the $10-per-unit rate
is used, or the $5-per-direct-labor-hour rate is used, $10 of fixed overhead will be
allocated to every unit produced, no matter how many direct labor hours are actually
used per unit. (If this fact is not obvious to you, refer back to Chapter 10 on standard
costing.) Therefore, for the purpose of calculating the volume variance, we might as
well use the easiest allocation base, which is units-of-output.

It is important to recognize that even though most manufacturing companies use a

standard costing system, and even though the calculation of the fixed overhead
volume variance relies on the concept of standard costing, companies can calculate
the volume variance even if they do not use a standard costing system. In this case, the
calculation is identical to the discussion above, but the company will not be able to
obtain the required information from the cost accounting system itself, but rather, will
need to make a separate calculation.

Comprehensive Example of Fixed Overhead Variances:

The Coachman Company makes pencils. The pencils are sold by the box. Following is
information about the companys only factory:
Number of boxes
Direct labor hours
Machine hours
Fixed overhead

Budget
10,000
200
500
$40,000

Actual
12,000
250
650
$42,000

Capacity
20,000

The outputs here are boxes of pencils. The inputs are direct labor hours and machine
hours. First we calculate a fixed overhead rate using actual amounts, and output units
as the allocation base:
$42,000 12,000 boxes = $3.50 per box.
Using this overhead rate, every box of pencils is costed at the variable cost of
production plus $3.50 in allocated fixed overhead.
Next we calculate a fixed overhead rate using budgeted costs, and budgeted output
units as the denominator-level concept:
$40,000 10,000 boxes = $4.00 per box.
Next we calculate a fixed overhead rate using budgeted costs, and factory capacity as
the denominator-level concept (expressed in terms of output units).
$40,000 20,000 boxes = $2.00 per box.
The advantage of using capacity in the denominator is that this denominator-level
concept shows how low the fixed cost per unit can go, and hence, how low the total
cost per unit can go, as production increases.

The fixed overhead spending variance is calculated as follows:

$42,000 actual $40,000 budgeted = $2,000 unfavorable.
Next, we calculate the volume variance using capacity as the denominator-level
concept:
volume variance = ($2.00 per box x 12,000 boxes) $40,000 = $16,000 unfavorable
or equivalently:
volume variance = $2.00 per box x (12,000 boxes 20,000 boxes) = $16,000
unfavorable
If the company uses a standard costing system, the amount
of overallocated or underallocated fixed overhead is the difference between actual
fixed overhead incurred, and fixed overhead allocated to product, calculated as
follows:
actual fixed overhead fixed overhead allocated
$42,000 ($2.00 per box x 12,000 boxes)
= $42,000 $24,000 = $18,000 underallocated
This $18,000 of underallocated fixed overhead is equal to the sum of the $2,000
unfavorable fixed overhead spending variance and the $16,000 unfavorable volume
variance.
Next, we calculate the volume variance using budgeted production as the
denominator-level concept:
volume variance = ($4.00 per box x 12,000 boxes) $40,000 = $8,000 favorable
or equivalently:
volume variance = $4.00 per box x (12,000 boxes 10,000 boxes) = $8,000 favorable
If the company uses a standard costing system, the amount
of overallocated or underallocated fixed overhead is the difference between actual

fixed overhead incurred, and fixed overhead allocated to product, calculated as

follows:
actual fixed overhead fixed overhead allocated
$42,000 ($4.00 per box x 12,000 boxes)
= $42,000 $48,000 = $6,000 overallocated
This $6,000 of overallocated fixed overhead is equal to the sum of the $2,000
unfavorable fixed overhead spending variance (which did not change when we
changed the denominator-level concept from capacity to budgeted production) and the
$8,000 favorable volume variance.
To illustrate that the choice of allocation base does not affect the calculation of the
volume variance, we recalculate the volume variance assuming the company allocates
overhead using machine hours as the allocation base and budgeted production as the
denominator-level concept. The budgeted overhead rate is now
$40,000 500 machine hours = $80 per machine hour.
Since the standard for machine time is one hour for every twenty boxes (derived from
the budget column in the box at the beginning of the example), the standard costing
system will allocate fixed overhead as follows:
Budgeted overhead rate x (standard inputs allowed for actual outputs achieved)
= $80 per machine hour x (12,000 boxes 20 boxes per machine hour)
= $80 per machine hour x 600 machine hours = $48,000
And the volume variance is
fixed overhead allocated to product budgeted fixed overhead
= $48,000 $40,000 = $8,000 favorable, as before.

Yield (finance)

From Wikipedia, the free encyclopedia

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removed. (January 2011)

Finance

Financial markets[show]

Financial instruments[show]

Corporate finance[show]

Personal finance[show]

Public finance[show]

Banks and banking[show]

Financial regulation[show]

Standards[show]

Economic history[show]

V
T
E

In finance, the term yield describes the amount in cash (in percent terms) that returns to the owners
of a security. Normally, it does not include the price variations, at the difference of the total return.
Yield applies to various stated rates of return on stocks (common and preferred, and convertible),
fixed income instruments (bonds, notes, bills, strips, zero coupon), and some other investment type
insurance products (e.g. annuities).
The term is used in different situations to mean different things. It can be calculated as a ratio or as
an internal rate of return (IRR). It may be used to state the owner's total return, or just a portion
of income, or exceed the income.
Because of these differences, the yields from different uses should never be compared as if they
were equal. This page is mainly a series of links to other pages with increased details.
Contents

[hide]

1 Bonds, notes, bills

2 Preferred shares

3 Preferred trust units

4 Common shares

5 Annuities

6 REITs, royalty trust, income trusts

7 Real Estate & Property

8 How to evaluate the yield (%)

9 See also

10 References

Bonds, notes, bills[edit]

Main article: Bond valuation
The coupon rate (also nominal rate) is the yearly total of coupons (or interest) paid divided by the
Principal (Face) Value of the bond.
The current yield is those same payments divided by the bond's spot market price.
The yield to maturity is the IRR on the bond's cash flows: the purchase price, the coupons received
and the principal at maturity.
The yield to call is the IRR on the bond's cash flows, assuming it is called at the first opportunity,
instead of being held till maturity.
The yield of a bond is inversely related to its price today: if the price of a bond falls, its yield goes up.
Conversely, if interest rates decline (the market yield declines), then the price of the bond should rise
(all else being equal).
There is also TIPS (Treasury Inflation Protected Securities), also known as Inflation Linked fixed
income. TIPS are sold by the US Treasury and have a "real yield". The bond or note's face value is
adjusted upwards with the CPI-U, and a real yield is applied to the adjusted principal to let the
investor always outperform the inflation rate and protect purchasing power. However, many
economists believe that the CPI under-represents actual inflation. In the event of deflation over the
life of this type of fixed income, TIPS still mature at the price at which they were sold (initial face).
Losing money on TIPS if bought at the initial auction and held to maturity is not possible even if
deflation was long lasting.

Preferred shares[edit]
Like bonds, preferred shares compensate owners with scheduled payments which resemble interest.
However, preferred "interest" is actually in the form of a dividend. This is a significant accounting

difference as preferred dividends, unlike debt interest, are charged after taxes and below net
income, therefore reducing net income and ultimately earnings per share. Preferred shares may also
contain conversion privileges which allow for their exchange into common stock.
The dividend yield is the total yearly payments divided by the principal value of the preferred share.
The current yield is those same payments divided by the preferred share's market price.
If the preferred share has a maturity (not always) there can also be a yield to maturity and yield to
call calculated, the same way as for bonds.

Preferred trust units[edit]

Like preferred shares but units in a trust. Trusts have certain tax advantages to standard
corporations and are typically deemed to be "flow-through" vehicles. Private mutual funds trusts are
gaining in popularity in Canada following the changes to tax legislation which forced many publicly
traded royalty trusts to convert back into corporations. Investors seeking the high yields typically
associated with the energy royalty trusts are increasingly investing in private mutual energy fund
trusts.

Common shares[edit]
Common shares will often pay out a portion of the earnings as dividends. The dividend yield is the
total dollars (RMB, Yen, etc.) paid in a year divided by the spot price of the shares. Most web sites
and reports are updated with the expected future year's payments, not the past year's.
The price/earnings ratio quoted for common shares is the reciprocal of what is called the earnings
yield. EarningsPerShare / SharePrice.

Annuities[edit]
The life annuities purchased to fund retirement pay out a higher yield than can be obtained with
other instruments, because part of the payment comes from a return of capital. $YearlyDistribution /
$CostOfContract.

REITs, royalty trust, income trusts[edit]

Like annuities, distribution yields from REITs, Royalty trusts, and Income trusts often include cash
that exceeds the income earned: that is return of capital. $YearlyDistribution / $SharePrice.

Real Estate & Property[edit]

Several different yields are used as measures of a real estate investment,
including initial, equivalent and reversionary yields.
Initial Yield is the annualised rents of a property expressed as a percentage of the property
value.Initialyield.com (May 2012). "Glossary, Initial Yield". Initial Yield. Retrieved May 2012. E.g.
100,000 passing rent per annum 1,850,000 valuation 100000/1850000 = 0.054 or 5.4%
Reversionary Yield is the anticipated yield to which the initial yield will rise (or fall) once the rent
reaches the ERV.Initialyield.com (May 2012). "Glossary, Reversionary Yield". Reversionary Yield.
Retrieved May 2012. E.g. 150,000 ERV per annum 1,850,000 valuation 150000/1850000 = 0.081
or 8.1%
Equivalent Yield lies somewhere in between the initial yield and reversionary yield, it encapsulates
the DCF of the property with rents rising (or falling) from the current annualised rent to the underlying

estimated rental value (ERV) less costs that are incurred along the way. The discount rate used to
calculate the net present value (NPV) of the DCF to equal zero is the equivalent yield, or
the IRR.Initialyield.com (May 2012). "Glossary, Equivalent Yield". Equivalent Yield. Retrieved May
2012.
The calculation not only takes into account all costs, but other assumptions including rent reviews
and void periods. A trial and error method can be used to identify the equivalent yield of aDCF, or if
using Excel, the goal seek function can be used.

How to evaluate the yield (%)[edit]

All financial instruments compete with each other in the market place. Yield is one part of the total
return of holding a security. A higher yield allows the owner to recoup his investment sooner, and so
lessens risk. But on the other hand, a high yield may have resulted from a falling market value for
the security as a result of higher risk.
Yield levels vary mainly with expectations of inflation. Fears of high inflation in the future mean that
investors ask for high yield (a low price vs the coupon) today.
The maturity of the instrument is one of the elements that determines risk. The relationship between
yields and the maturity of instruments of similar credit worthiness, is described by the yield curve.
Long dated instruments typically have a higher yield than short dated instruments.
The yield of a debt instrument is generally linked to the credit worthiness and default probability of
the issuer. The more the default risk, the higher the yield would be in most of the cases since issuers
need to offer investors some compensation for the risk.

See also[edit]

Ecological yield

Yield curve

30-day yield

7 Day SEC Yield

Nominal yield

Bond (finance)

Ch. 8 Location Planning and Analysis

Edit 0 156
Summary
Location Planning
Every firm must use location planning techniques. There are many options for location planning.
Corporations choose from expanding an existing location, shutting down one location and moving to
another, adding new locations while retaining existing facilities, or doing nothing. There are a variety of
methods used to decide the best location or alternatives for the corporation. Methods such as identifying

the country, general region, small number of community alternatives, and site alternatives.
Several factors that influence location positioning include the location of raw materials, proximity to the
market, climate, and culture. Models for evaluating whether a location is best for an organization consist
of cost-profit analysis for locations, the center of gravity model, the transportation model, and factor
rating.
This chapter discusses the decision to relocate a facility by considering costs and benefits. If you are
planning on moving or acquiring a new facility, there are many factors to consider: the size, the
geographic area, culture, transportation costs and others. After a location or locations have been chosen
a cost-profit-volume analysis is done.
The main factors that affect location decisions include regional factors, community
considerations, and site-related factors. Community factors consist of quality of life,
services, attitudes, taxes, environmental regulations, utilities, and development support.
EVALUATING LOCATION ALTERNATIVES (Page 385)
There are three specific analytical techniques available to aid in evaluating location alternatives:

1.
1.

Location Cost-Volume-Profit Analysis:

The Cost-Volume-Profit (CVP) Analysis can be represented either mathematically or
graphically. It involves three steps: 1) For each location alternative, determine the fixed and variable
costs, 2) For all locations, plot the total-cost lines on the same graph, and 3) Use the lines to determine
which alternatives will have the highest and lowest total costs for expected levels of output. Additionally,
there are four assumptions one must keep in mind when using this method:

1.

Fixed costs are constant.

2.

Variable costs are linear.

3.

Required level of output can be closely estimated.

4.

There is only one product involved.

5.
2.

Total cost = FC = v(Q)

where FC=Fixed Cost, v=Variable Cost per Unit, Q=Number of Units (Also shown below but not in the
same format)

1.
1.

Factor Rating
This method involves qualitative and quantitative inputs, and evaluates alternatives
based on comparison after establishing a composite value for each alternative. Factor Rating consists of
six steps:

1.

Determine relevant and important factors.

2.

Assign a weight to each factor, with all weights totaling 1.00.

3.

Determine common scale for all factors, usually 0 to 100.

4.

Score each alternative.

5.

Adjust score using weights (multiply factor weight by score factor); add up scores
for each alternative.

6.

The alternative with the highest score is considered the best option.

2.

Minimum scores may be established to set a particular standard, though this is not
necessary.

2.
o

Center of Gravity Method:

This technique is used in determining the location of a facility which will either reduce
travel time or lower shipping costs. Distribution cost is seen as a linear function of the distance and
quantity shipped. The Center of Gravity Method involves the use of a visual map and a coordinate
system; the coordinate points being treated as the set of numerical values when calculating averages. If
the quantities shipped to each location are equal , the center of gravity is found by taking the averages of
the x and ycoordinates; if the quantities shipped to each location are different , a weighted average must
be applied (the weights being the quantities shipped).
Company Relocating
There are many factors that contribute to a company relocating. Some of the reasons include expanding
the market and diminishing resources. For an existing company to relocate, they must weigh their options
when planning to relocate elsewhere. They can expand their existing facility, add new ones and keep their
existing facilities open, move to another location and shut down one location, or keep things the way they
are and not do anything. Globalization has led many companies to set up operations in other countries.
Two factors that make relocation appealing are advances in technology and trade agreements. By going
global, companies will expand their markets and be able to cut costs in labor, transportation, and taxes.
They also have gained ideas for new products and services.
IDENTIFYING A COUNTRY, REGION, COMMUNITY, AND SITE (Page 376)
factors that influence location decisions are:
Manufacturing :
o Availability of energy and water
o Proximity to raw materials
o Transportation cost
Service:
o Traffic patterns
o Proximity to markets
o Location of competitors
important factors have been determined, an organization will narrow down
alternatives to a specific geographic region. These factors that influence location selection
are often different depending on whether the firm is a manufacturing or service firm. When
deciding on a location, mangers must take into account the culture shock employees might

face after a location move. Culture shock can have a big impact on employees which might
affect workers productivity, so it is important that mangers look at this.
v IDENTIFYING A COUNTRY
o A decision maker must understand the benefits and risks as well as the probabilities of
them occurring
v IDENTIFYING A REGION- 4 major considerations
o Location to Raw Materials: The three most important reasons for a firm to locate in a
particular region includes raw materials, perishability, and transportation cost. This often
depends on what business the firm is in.
o Location to Markets: Profit maximizing firms locate near markets that they want to serve as
part of their competitive strategy. A Geographic information system(GIS) is a computer
based tools for collecting, storing, retrieving, and displaying demographic data on maps.
o Labor Factors : Primary considerations include labor availability, wage rates, productivity,
attitudes towards work, and the impact unions may have.
o Other : Climate is sometimes a consideration because bad weather can disrupt operations.
Taxes are also an important factor due to the fact that taxes affect the bottom line in some
financial statements.
v IDENTIFYING A COMMUNITY
o There are many important factors for deciding upon the community in which move a
business. They include facilities for education, shopping, recreation and transportation
among many others. From a business standpoint these factors include utilities, taxes, and
environmental regulation.
v IDENTIFYING A SITE
o The main considerations in choosing a site are land, transportation, zoning and many
others. When identifying a site I]it is important to consider to see if the company plans on
growing at this location. If so, the firm must consider whether or not location is suitable for
expansion. There are many decisions that go into choosing exactly where a firm will establish its
operations. First, a company must determine the driving factors that will influence which areas are
suitable locations. After these factors have been determined, the company will identify potential countries
and examine the pros and cons of establishing operations in these countries. After looking at pro and
cons of the different countries and deciding on a country, then decision makers will identify a region within
the country. When identifying a region, decision makers must take the four major factors explained above
into consideration. The last two stages of the search include choosing a community and a site.

Note: The above part is way too lengthy for this assignment.
Summary below..

Summary : There are several ways that are very helpful in evaluating location alternatives, such as
locational cost-profit-volume analysis, factor rating, and the center of gravity method. First, let's take a
look at Location Cost-Profit-Volume Analysis.
This analysis can be done numerically or graphically. The procedure for locational cost-profit-volume

analysis involves these steps:

1. Determine the fixed and variable costs associated with each location alternative.
2. Plot the total-cost lines for all location alternatives on the same graph.
3. Determine which location will have the lowest total cost for the expected level of output. Alternatively,
determine which location will have the highest profit.
This method assumes the following:
1. Fixed costs are constant for the range of probable output.
2. Variable costs are linear for the range of probable output.
3. The required level of output can be closely estimated.
4. Only one product is involved.
Here're a couple of important formulas to remember:

Total cost = Fixed cost + Variable cost per unit * Quantity or volume of output

Total profit = Quantity(Revenue per unit - Variable cost per unit) - Fixed cost

In most situations, other factors besides cost must also be considered. We will now consider another kind
of cost often considered in location decisions: transportation costs.
Transportation costs sometimes play an important role in location decisions. The company can include
the transportation costs in a locational cost-volume analysis by incorporating the transportation cost per
unit being shipped into the variable cost per unit if a facility will be the sole source or destination of
shipments. When there is a problem with shipment of goods from multiple sending points to multiple
receiving points, and a new location is to be added to the system, the company should undertake a
separate analysis of transportation. In this case, transportation model of linear programming is very
helpful. The model is used to analyze each of the configurations considered, and it reveals the minumum
costs each would provide. Then the information can be included in the evaluation of location alternatives.

Multiple Plant Manufacturing Strategies (page 381-382)

-When comapnies have several manufacturing facilities t here are several different ways for a company to
organize their operations. These ways include: assigning different product lines to different plants,
assigning different market areas to different plants, or assigning different processes to different plants.
These strategies carry their own cost and managerial implications, but they also carry a certain
competitive advantage. There are four different types of plant strategies:

1.

Product Plant Strategy

Products or product lines are produced in separate plants, and each plant is usually responsible
for supplying the entire domestic market.

It is a decentralized approach as each plant focuses on a narrow set of requirements that

includes specialization of labor, materials, and equipment along product lines.

Specialization involved in this strategy usually results in economies of scale and, compared to
multipurpose plants, lower operating costs.

The plant locations may either be widely scattered or placed relatively close to one another.

2. Market Area Plant Strategy

Here, plants are designed to serve a particular geographic segment of a market.

The individual plants can produce either most, or all of the company's products and supply a
limited geographical area.

The operating costs of this strategy are often times higher than those of product plants, but
savings on shipping costs for comparable products can be made.

This strategy is useful when shipping costs are high due to volume, weight, or other factors.

It can also bring the added benefits of faster delivery and response times to local needs.

It requires a centralized coordination of decisions to add or delete plants, or to expand or

downsize current plants because of changing market conditions.

3. Process Plant Strategy

Here, different plants concentrate on different aspects of a process.

This strategy is most useful when products have numerous components; separating the
production of components results in less confusion than if all the production were done in the same
location.

A major issue with this strategy is the coordination of production throughout the system, and it
requires a highly informed, centralized administration in order to be an effective operation.

It can bring about additional shipping costs, but a key benefit is that individual plants are highly
specialized and generate volumes that brings economies of scale.

4. General-Purpose Plant Strategy

Plants are flexible and have the ability to handle a range of products

It allows for a quick response to products and market changes, but can be less productive than a
more focused approach.

A benefit to this approach is the increase in learning opportunities that happens when similar
operations are being done in different plants. Solutions to problems as well as improvements made at one
plant can be shared with the other plants

Question 1:
From a company standpoint, which factors determine the desirability of a community as a place for its
workers and managers to live?
A) The amount of parking spaces
B) Retail stores
C) Schools
D) Locals attitudes towards the company.
E) Both C and D.
Answer: E. Page 380.
Question 2:
What is NOT a risk a corporation must consider when planning a location?
A) Political
B) Exporting
C) Economic
D) Cultural
E) Economic
Answer: B. Pages 373-374.
Question 3:
What do banks, fast-food chains, supermarkets, and retail stores view locations as?
A) One in many intricate decisions for their organizations
B) A crucial part of the marketing strategy.
C) An easier way to distribute their product or service.
D) New ideas for future investments.
E) A second home.
Answer: B. Page 369
Question 4:
What is the third step when making location decisions?
A) Evaluate the alternatives and make a selection.
B) Identify important factors.
C) Decide on criteria for evaluating alternatives.
D) Develop location alternatives.
E) None of the above.
Answer: D. Page 376.

Question 5:
What is the center of gravity method?
A) A method that determines the location of a facility that will minimize shipping cost and travel time to
various destinations.
B) A method that determines the location of a facility closest to the most number of consumers.
C) A method that determines the location of a facility closest to the main supplier
D) A method that determines the location of a facility in the middle-point of all suppliers.
E) none of the above
Answer: A. Page 388
1.) Location analysis assumes that both qualitative and quantitative factors are important in determining
an ideal location when using:
a. The Transportation Model
b. The Center of Gravity Method
c. Factor Rating
d. Cost-Profit Analysis
e. None of the above
Page 379 9th Ed.
2.) The transportation model can be applied to solve factors including:
I. Cost
II. Profit
III. Capacity
IV. Management
a. I only
b. I and II only
c. I, II, and III only
d. II, III, and IV only
e. II and IV only
Page 391 9th Edition
3.) The Transportation Model uses the following information to determine costs:
a. A list of shipping origins
b. Demand of destinations
c. Unit costs
d. None of the above
e. All of the above

4.) Which is a TRUE assumption needed to perform Cost-Profit Volume Analysis?

a. Fixed costs are exponential
b. Variable costs are logarithmic
c. All costs are linear
d. At least 2 products are being compared

e. Revenue is NOT included in the analysis

*9th Edition says that variable costs are linear, and fixed costs are constant.*
5.) In the Factor Rating Method of location analysis, which of the following is NOT a managerial choice?
a. Assigning weight to the importance of aspects being compared
b. Adding the applied (weight x value) of various categories to get a composite for a location
c. Determining the ultimate choice for the location
d. Assigning information gathering on a location
e. All of the above are managerial choices
Question 5 needs an answer, also needs page numbers where answers are found

1) What does GIS stand for?

A. General Information Systems
B. Great Information Systems
C. Geographic Information Systems
D. General Institutions
E. None of the above
Answer: C
2)The primary consideration for identifying a site is?
A. Location
B. Zoning
C. Transportation
D. None of the Above
E. All of the above
Answer: E
3) What are the common techniques used to evaluate location alternatives?
A. Locational cost-profit-volume analysis
B. Factor ratings
C. Center of gravity method
D. Transportation model
E. All of the above
Answer: E
4) What is a general-purpose plant strategy?
A. A general approach to evaluating locations that include qualitative and quantitative inputs.
B. A way to evaluate rating of geographic area
C. A general approach to evaluating locations that include regional inputs.
D. A way of being capable of handling a wide range of different products.
E. None of the above
Answer: D

5) Method for locating a distribution center that minimizes the distribution costs.
A.Location cost-pofit-volume analysis
B. Method for finding balance between company culture and geographic culture.
C. Method that compares costs to benefits
D. All of the above.
E. None of the above
Answer: A

1) What is a primary factor in the regional level of location decisions?

A. Location of raw materials or supplies
B. Quality of life
C. Location of markets
D. A and C
E. None of the above
Answer: D page 365 (9th edition)
2) In a geographic information system (GIS), which is NOT involved in the data?
A. Age
B. Incomes
C. Quality of life
D. Type of employment
E. Type of housing
Answer: C page 366 (9th edition)
3) What is a disadvantage of globalization?
A. Transportation costs
B. Security costs
C. Unskilled labor
D. Import restrictions
E. All of the above
Answer: E page 373 (9th edition)
4) Mining operations, farming, forestry, and fishing are all examples of which primary reason for firms
locating near or at the source of raw materials?
A. Necessity
B. Perishability
C. Transportation costs
D. Processing
E. None of the above
Answer: A page 365 (9th edition)

5) Which of the following would you establish a composite value for?

A. The transportation model
B. Factor rating
C. The center of gravity method
D. Locational Cost-Profit-Volume Analysis
E. Geographic information system
Answer: B page 379 (9th edition)

1. Which of these is a computer-based tool for collecting, storing, retrieving, and displaying
demographic data on maps?
A. Geographic Data System
B. Geographic Information System
C. Demographic Data System
D. CAM
E. none of the above
Answer: B page 379
2. Which is a major consideration when choosing to operate in a region?
A. the minimum wage rate
B. identifying a community
C. location to raw materials
D. possible sites available
E. none of the above
Answer: C page 378

3. Considering global expansion, decision makers need to be absolutely clear on the benefits and risks
and the likelihood of their occurrences when deciding upon identifying:
A. a continent
B. a site
C. a community
D. a country
E. none of the above
Answer: D page 378
4. A dominant factor that influences the location decision of a manufacturing firm is:
A. Climate changes
B. Location to competitors
C. Proximity to markets
D. Transportation cost
E. none of the above
Answer: D page 376

5. Which of the following is Not a primary consideration when identifying a site for operations?
A. Land
B. Transportation
C. Zoning
D. Future expansion
E. All of the Above
Answer: E page 381

1 . When using the Center of Gravity Method, what are the two differing variables for equal and unequal
quantities shipped, respectively?
a. n 1 ; n 2
b. n;Q
c. n; n i
d. e; u e
e. n; Q i
Answer: e ( pages 388-89 )
2. Which location alternative technique involves viewing the problem in economic terms?
a. Factor Rating
b. CVP
c. GIS
d. Center of Gravity
e. Transportation Model
Answer: b ( page 385 )
3. When considering foreign locations, crime, and the threat of terrorism fall under which category?
a. Safety
b. Cultural Differences
c. Market
d. Financial
e. Customer Preferences
Answer: a ( page 378 )
4. When using the factor rating method of location alternative evaluation, which of the following could be
considered relevant factors?
a. Location of market
b. Water supply
c. Parking facilities
d. Revenue potential
e. All of the above
Answer: e ( page 387 )
5. Which of the following is not a step in the general procedure for making location decisions?
a. Develop location alternatives

b. Evaluate the alternatives and make a selection

c. Gain government approval of location alternatives
d. Decide on criteria for evaluating alternatives
e. Identify important factors (e.g., location of markets)
Answer: c ( page 376 )
Chapter 8
Summary:
The location of a business is crucial to its growth. There are many factors that come into play when
choosing a suitable location. Usually it is one or a few factors that dominate the decision making process.
For example, a change in market supply and/or demand, perhaps even if inputs used by the business
have run out. A business can suffer greatly if the right location is not chosen. Therefore a business should
evaluate all their options very carefully before making a final conclusion.
There are generally four options a manager has with regard to location planning. The first option would be
to take the current facility and make it bigger. The second would be to keep the current facility and just
create a (or many) new one(s). The third would be to close down the current facility entirely and build a
new one. The last option would be to keep things the way they are.
Questions: Questions need to be multiple choice format.

1. What is the name of the computer-based tool used for collecting, storing, retrieving, and displaying
demographic data on maps?
A: Geographic Information System (GIS)
2. True or False: Most organizations try to find the one best location.
A: False
3. What are the three primary regional factors involved in location decision making?
A: raw materials, markets, and labor considerations
4. Name three trade agreements mentioned in this chapter.
A: North American Free Trade Agreement (NAFTA), the General Agreement on Tariffs and Trade
(GATT), and the U.S. China Trade Relations Act
5. What are five disadvantages to having global operations?
A: Transportation costs, security costs, unskilled labor, import restrictions, and criticisms.
6. Suppose that the operating costs of a company has a weight of .20. There are three possible location

choices. The first location has a score of 60/100. The second location has a score of 50/100. The third
location has a score of 80/100. What are the weighted scores of each location possibility?
A:
Location 1: .20(60) = 12
Location 2: .20(50) = 10
Location 3: .20(80) = 16
7. What are some benefits associated with a company moving it's operation's globally?
A: Market expansion, financial savings, legal, etc.
8. What is the center of gravity method used for?
A: Locating a distribution center that minimizes distribution costs.
9. Find the center of gravity with the information provided below.

Destination

L1

L2

L3

L4

A:
x = 21/4 = 5.25
y = 15/4 = 3.75
The center of gravity is located at (5.25, 3.75)
10. Determine the center of gravity based on the following information:

Destination

Weekly Quantity

L1

700

L2

500

L3

800

L4

600

L5

200

Total

28

21

2,800

A:
x = [7(700) + 5(500) + 8(800) + 6(600) + 2(200)] / 2,800 = 6.36
y = [6(700) + 3(500) + 6(800) + 4(600) + 2(200)] / 2,800 = 4.75
11. Use the table below and the cost-profit-volume analysis to determine the B Superior range
approximation.

Location

Fixed Costs per Year

Variable Costs per Unit

$250,000

$20

$150,000

$50

$350,000

$25

$225,000

$40

A:
Total Cost of C = Total Cost of B
350,000 + 25Q = 150,000 + 50Q
200,000 = 25Q
Q = 8,000
12. Use the table from Question 12 and the cost-profit-volume analysis to find the C Superior range
approximation.
A:
Total Cost of A = Total Cost of C
250,000 + 20Q = 350,000 + 25Q
5Q = 100,000
Q = 20,000
Use the following information to answer question 1-3.
A firm paid $2000 for rent, $300 for maintenance fee in January. They sold 2000 units in the month and
the cost per unit was $5. The price for the product is $10 per unit.
1. What is their total costs for the month?

a. $2300
b. $10000
c. $12300
d. $2000
e. none of the above
Answer: c. page 376
2. What is the firms total revenue for the month?
a. $20000
b. $10000
c. $2300
d. $2000
e. none of the above
Answer: a. page 378
3. What is the firms profit for the month ?
a. $20000
b. $10000
c. $12300
d. $7700
e. none of the above
Answer: d. page 378
4. If two alternatives yield comparable annual costs, management would be indifferent in choosing
between the two in terms of _.
a. total revenue
b. total costs
c. total profit
d. total variable costs
e. total fixed costs
Answer b. page 378
5. The transportation cost must be converted into cost per unit of in order to correspond to other variable
costs if raw materials are involved.
a. input
b. output
c. initial input
d. both a& b
e. none of the above

Answer: b. page 378

6. Which of the following is NOT a governmental factor when locating in a foreign region?
a) Import restrictions
b) Currency restrictions
c) Liability laws
d) Local product standards
e) all of the above
Answer: E, pg. 378