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Chapter 20: Problem 5

Intuit Inc. develops and sells software products for the personal finance market, including popular titles such as Quicken \({ }^{\mathrm{B}}\) and TurboTax \({ }^{\mathrm{S}}\). Classify each of the following costs and expenses for this company as either variable or fixed to the number of units produced and sold: a. Packaging costs b. Salaries of software developers c. Salaries of customer support personnel d. CDs e. Sales commissions f. Advertising g. Straight-line depreciation of computer equipment h. Shipping expenses i. Wages of telephone order assistants j. Property taxes on general offices k. User's guides 1\. President's salary

Short Answer

Expert verified
Variable costs: a. Packaging, d. CDs, e. Sales commissions, h. Shipping, k. User's guides Fixed costs: b. Software developers' salaries, c. Customer support salaries, f. Advertising, g. Depreciation, i. Telephone assistants' wages, j. Property taxes, l. President's salary.

Step by step solution

01

Differentiate Between Variable and Fixed Costs

Variable costs change in total proportionally with the number of units produced and sold. Fixed costs remain unchanged regardless of the number of units produced and sold. By understanding these definitions, we can classify each cost.
02

Classify Packaging Costs

Packaging costs are incurred for each unit produced and sold. As more units are sold, the total packaging cost increases. Therefore, packaging costs are classified as variable.
03

Classify Salaries of Software Developers

These salaries are generally fixed since software developers are paid a consistent salary regardless of how many units are produced and sold.
04

Classify Salaries of Customer Support Personnel

These are fixed costs if customer support staff are paid a regular salary that does not fluctuate with sales volume.
05

Classify CDs

The cost of CDs is a variable cost because it depends on the number of software units produced and sold.
06

Classify Sales Commissions

Sales commissions are variable costs, as they are usually a percentage of sales and increase with the number of units sold.
07

Classify Advertising Costs

Typically, advertising expenses are fixed due to budgets set in advance, although they might vary over time, they do not directly vary with units produced or sold.
08

Classify Straight-Line Depreciation of Computer Equipment

Depreciation using the straight-line method is a fixed cost as it is calculated evenly over the useful life of the equipment, not influenced by production volume.
09

Classify Shipping Expenses

Shipping expenses are variable because they increase with the number of units sold. More units sold typically means more shipping costs.
10

Classify Wages of Telephone Order Assistants

These wages are usually fixed if assistants are paid a regular wage that does not change with sales volume.
11

Classify Property Taxes on General Offices

Property taxes are fixed costs as they are consistent and do not change with the level of production or sales.
12

Classify User's Guides

The cost of user鈥檚 guides is a variable cost as it depends on the number of units produced and sold.
13

Classify President's Salary

The president's salary is a fixed cost because it remains constant regardless of the number of units produced and sold.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Variable Costs
Variable costs are those expenses that change directly with the level of production or sales volume. This means that as a company produces more units or sells more, the total amount spent on these costs will increase. In the case of Intuit Inc., some clear examples of variable costs include:

  • Packaging Costs: As more software products are shipped, more packaging is needed, increasing the total cost.
  • CDs: Each additional software unit produced requires its own physical CD, thus incurring more cost as production rises.
  • Sales Commissions: Often calculated as a percentage of sales, these costs rise with increased sales volume.
  • Shipping Expenses: More sales mean more shipments, boosting the total shipping expenditure.
  • User's Guides: Like CDs, each software product sold requires a user's guide, which also increases with sales volume.

Variable costs are crucial for businesses to understand because they directly affect the cost of goods sold (COGS) and ultimately impact profit margins. The more units sold, the higher the variable costs. However, managing these can lead to cost savings and improved profitability.
Fixed Costs
Fixed costs, unlike variable costs, do not change with the level of output or sales. These costs remain the same month-to-month, providing a stable baseline for a company's expenses. For Intuit Inc., some of the fixed costs include:

  • Salaries of Software Developers: Developers are usually salaried employees, receiving a constant amount regardless of changes in production levels.
  • Salaries of Customer Support Personnel: If customer support staff are salaried, their costs remain unchanged by sales volume.
  • Advertising: Often set by a determined budget, advertising costs are planned for a specific period and do not fluctuate with sales.
  • Straight-line Depreciation of Computer Equipment: This cost is spread evenly over the equipment's useful life, remaining stable without regard to production changes.
  • Property Taxes on General Offices: Property taxes are predictable, fixed costs that do not change with company output.
  • President's Salary: The salary paid to a company's president is usually set and fixed, unaffected by how many units are produced or sold.

Understanding fixed costs is key because it helps in planning budgets and setting prices. Businesses need to cover their fixed costs to break even and achieve profitability.
Cost Analysis
Cost analysis involves assessing a company's costs to understand their behavior, control expenditure, and enhance profitability. In analyzing costs, companies look at both fixed and variable components to make informed decisions. Here are some insights on cost analysis:

  • Objective: The main aim is to determine how costs change with different levels of business activity, such as production or sales.
  • Importance: Understanding cost behavior ensures better budget forecasts and helps in strategic planning.
  • Decision making: By knowing which costs change with sales and production, businesses can identify where to cut expenses or where to invest more. For example, if the cost of packaging is rising significantly, a company might explore bulk buying for discounts.

Effective cost analysis enhances a business's ability to compete, as it provides critical data needed for pricing strategies and cost management.
Cost Accounting
Cost accounting focuses on capturing all costs related to the production of a product or delivery of a service. By evaluating these costs, businesses can make more informed operational decisions. Here's why cost accounting matters for Intuit Inc. and similar companies:

  • Tracking: It systematically records and analyzes costs, assuring that businesses know exactly where their money is going.
  • Efficiency: It helps identify areas where a company can improve efficiency and cut waste, which is crucial for staying competitive.
  • Pricing: Properly accounting for costs ensures product pricing reflects the actual costs of production, thus supporting financial sustainability.

Cost accounting plays a key role in financial reporting, aiding businesses in evaluating their financial health and making strategic decisions to optimize profits.

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Most popular questions from this chapter

Nextel Communications Inc. is one of the largest digital wireless service providers in the United States. In a recent year, it had 8,666,500 million handsets (accounts) that generated revenue of \(7,689,000,000. Costs and expenses for the year were as follows: Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \)2,869,000,000 Selling, general, and administrative expenses . . . . . . . 3,020,000,000 Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,746,000,000 Assume that \(70 \%\) of the cost of revenue and \(40 \%\) of the selling, general, and administrative expenses are variable to the number of handsets (accounts). a. What is Nextel's break-even number of accounts, using the data and assumptions above? Round per-unit calculations to the nearest dollar. b. How much revenue per account would be sufficient for Nextel to break even if the number of accounts remained constant?

At a recent staff meeting, the question of discontinuing Product \(Q\) from the product line was being discussed. The chief financial analyst reported the following current monthly data for Product \(Q\) : Units of sales 20,000 Break-even units 23,000 Margin of safety in units 3,000 For what reason would you question the validity of these data?

Salted Munchies, Inc. manufactures and sells two products, potato chips and pretzels. The fixed costs are \(\$ 300,000\), and the sales mix is \(60 \%\) potato chips and \(40 \%\) pretzels. The unit selling price and the unit variable cost for each product are as follows: $$ \begin{array}{lcc} \text { Products } & \text { Unit Selling Price } & \text { Unit Variable Cost } \\ \hline \text { Potato Chips } & \$ 2.80 & \$ 1.10 \\ \text { Pretzels } & 2.00 & 0.80 \end{array} $$ a. Compute the break-even sales (units) for the overall product, E. b. How many units of each product, potato chips and pretzels, would be sold at the break-even point?

Thoroughbred Railroad decided to use the high-low method and operating data from the past six months to estimate the fixed and variable components of transportation costs. The activity base used by Thoroughbred Railroad is a measure of railroad operating activity, termed 鈥済ross-ton miles,鈥� which is the total number of tons multiplied by the miles moved. $$ \begin{array}{cc} \begin{array}{c} \text { Transportation } \\ \text { Costs } \end{array} & \text { Gross-Ton Miles } \\ \hline \$ 1,463,000 & 595,000 \\ 1,372,000 & 540,000 \\ 1,322,000 & 485,000 \\ 1,641,000 & 740,000 \\ 1,522,000 & 670,000 \\ 1,748,000 & 840,000 \end{array} $$ Determine the variable cost per gross-ton mile and the fixed cost.

For the current year ending March 31 , Chow Company expects fixed costs of \(\$ 345,600\), a unit variable cost of \(\$ 32\), and a unit selling price of \(\$ 50\). a. Compute the anticipated break-even sales (units). b. Compute the sales (units) required to realize income from operations of \(\$ 45,900\).
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