Polaris offers extended service contracts that provide repair and maintenance co
ID: 2419385 • Letter: P
Question
Polaris offers extended service contracts that provide repair and maintenance coverage over its products. As you complete the following requirements, assume that the Polaris services
department uses many of Polaris’s existing resources such as its facilities, repair machinery, and computer systems. Write a two-page report addressing the following topics:
1.Identify several of the variable, mixed, and fixed costs that the Polaris services department is likely to incur in carrying out its services.
2.Assume that Polaris's services revenues are expected to grow by 25% in the next year. How do you expect the costs identified in part 1 to change, if at all?
3.Based on your answer to part 2, can Polaris use the contribution margin ratio to predict how income will change in response to increases in Polaris's services revenues?
Use the following Research Paper Format:
Times New Roman, with 12-point font size
Double Spaced
1-inch report margins
Cite Sources
Explanation / Answer
Business incur two kinds of operating costs — fixed costs and variable costs. Fixed costs do not vary with output, while variable costs do. i.e., variable costs increase with output but fixed costs broadly stay the same. Fixed costs are sometimes called overhead expenses.
Fixed costs are those which do not change with the level of activity within the relevant range. These costs will incur even if no units are produced. For example rent expense, straight-line depreciation expense, etc.
Fixed costs can be classified in the following categories for the purpose of analysis:
(i) Committed Costs:
Fixed costs that cannot be changed so quickly are committed costs, so called to express the idea that managers have made a commitment that cannot be readily changed. Such costs are primarily incurred to maintain the company’s facilities and physical existence, and over which management has little or no discretion.
(ii) Managed Costs:
Managed costs are related to current operations which must continue to be paid to ensure the continued operating existence of the company, e.g., management and staff salaries.
(iii) Discretionary Costs:
Some fixed costs can be quickly altered by managerial action and are called discretionary costs. They are also known as programmed costs. Discretionary costs are not related to current operations or activities and are subject to management discretion and control.
Variable costs are those costs that vary in total amount directly and proportionately with the output. There is a constant ratio between the change in the cost and change in the level of output. Direct material cost and direct labour cost are the costs which are generally variable costs. For example, if direct material cost is Rs 50 per unit, then for producing each additional unit, a direct material cost of Rs 50 per unit will be incurred.
Mixed costs or semi-variable costs have properties of both fixed and variable costs due to presence of both variable and fixed components in them. An example of mixed cost is telephone expense because it usually consists of a fixed component such as line rent and fixed subscription charges as well as variable cost charged per minute cost. Another example of mixed cost is delivery cost which has a fixed component of depreciation cost of trucks and a variable component of fuel expense.
Since mixed cost figures are not useful in their raw form, therefore they are split into their fixed and variable components by using cost behavior analysis techniques such as High-Low Method, Scatter Diagram Method and Regression Analysis.
2. with the increase in revenue by 25% the variable cost would also increase proportionately,. Fixed cost would remain same untill certain level of production while in the semi fixed cost , the variable portion would change proportaionately.