ECONOMICS

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COST ACCOUNTING

COST VOLUME PROFIT ANALYSIS

Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
Matt Milk Bar is planning to invest in a new blending machine, which will expand the range of drinks it can offer. Its owner has estimated the following daily results for drinks associated with the new machine:$Sales (200 units) 600Variable costs (450)Contribution 150Incremental fixed costs (45)Profit 105Which of the following statements that relate to the sensitivity of the investment are true?
A
The margin of safety is 92.5%.
B
If variable costs increase by 25% the investment will make a loss.
C
The margin of safety is 82.5%.
D
All of the above
Explanation: 

Detailed explanation-1: -Labour is the factor of production is most likely to be variable in the short run. Variable labour costs are any labour costs that go up or down with production levels.

Detailed explanation-2: -Variable costs change based on the amount of output produced. Variable costs may include labor, commissions, and raw materials. Fixed costs remain the same regardless of production output. Fixed costs may include lease and rental payments, insurance, and interest payments.

Detailed explanation-3: -Fixed costs have no impact of short run costs, only variable costs and revenues affect the short run production. Variable costs change with the output.

Detailed explanation-4: -Fixed costs remain the same in terms of their total dollar amount, regardless of the number of units sold. These are general expenditures that cannot be traced to any one item sold and may include electricity, insurance, depreciation, salary, and rent expenses. Fixed costs are considered within a relevant range.

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