Question

In a conventional CVP analysis, a step-wise cost can be treated as either a fixed cost or variable cost. This treatment involves manager judgement and depends on the ___________ and the ____________. Narrower ranges are more likely to be treated as _________.

Answer 1

In CVP analysis, manager judgment dictates whether a step-wise cost is treated as fixed or variable, based on the cost structure and relevant range.

Step-by-step explanation:

In a conventional CVP analysis, a step-wise cost can be treated as either a fixed cost or variable cost. This treatment involves manager judgment and depends on the cost structure and the relevant range. Narrower ranges are more likely to be treated as fixed costs.

To determine the cost structure for a firm, you calculate total cost, average variable cost, average total cost, and marginal cost based on the total fixed costs and variable costs.

The process and formulas for these calculations can be found in the Production, Costs, and Industry Structure chapter, particularly in a table similar to Table 8.8 mentioned. Understanding these costs is vital as each provides unique insights that are beneficial for the firm.