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193.     A classmate is having difficulty understanding two sets of accounting terms, variable and fixed costs, as opposed to period and product costs. He understands that variable costs change during an accounting period while fixed costs do not. However, he explains that a period cost implies that it is for a period of time and is, therefore, also fixed. Does his assumption imply that all product costs are then variable?


     Assist your classmate in being able to distinguish between these terms.

194.     Bonnie and Clyde started the BC Restaurant in 20X0. They rented a building, bought equipment, and hired two employees to work full time at a fixed monthly salary. Utilities and other operating charges remain fairly constant during each month.

During the past two years, the business has grown with average sales increasing 1% a month. This situation pleases both Bonnie and Clyde, but they do not understand how sales can grow by one percent a month while profits are increasing at an even faster pace. They are afraid that one day they will wake up to increas¬ing sales but decreasing profits.


Explain why the profits have increased at a faster rate than sales.

195.     Renew Tires has been in the tire business for five years. It rents a building but owns its equipment. All employees are paid a fixed salary except for the busy season (April – June), when temporary help is hired by the hour. Utilities and other operating charges remain fairly constant during each month except those in the busy season.

Selling prices per tire average $50 except during the busy season. Because a large number of customers buy tires prior to winter, discounts run above average during the busy season. A 15% discount is given when two tires are purchased at one time. During the busy months, selling prices per tire average $40.

The president of Renew Tires is somewhat displeased with the company's management accounting system because the cost behavior pattern displayed by the monthly break-even charts is inconsistent; the busy months' charts are different from the other months of the year. The president is never sure if the company has a satisfactory margin of safety or if it is just above the break-even point.


a.     What is wrong with the accountant's computations?
b.     How can the information be presented in a better format for the president?

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