Mgmt 312 Managerial Accounting - Embry-Riddle Aeronautical U

Mgmt 312 Managerial Accountingembry Riddle Aeronautical Universitymodu

Mgmt 312 Managerial Accounting Embry Riddle Aeronautical University Module 4 Research Paper Victoria Ridge 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: a) Identify several of the variable, mixed, and fixed costs that the Polaris services department is likely to incur in carrying out its services. b) 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? 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? Reference Wild, John J., & Shaw, Ken W. (2014). Managerial Accounting . McGraw-Hill/Irwin.

Paper For Above instruction

The Polaris services department, which offers extended service contracts providing repair and maintenance, incurs various costs categorized into variable, fixed, and mixed costs. Understanding these costs is essential for effective managerial decision-making and financial planning, especially in anticipation of revenue growth. This paper identifies typical costs in each category, examines how these costs may change with a projected 25% increase in revenues, and evaluates the utility of the contribution margin ratio in predicting income changes.

Variable, Fixed, and Mixed Costs in Polaris's Services Department

Variable costs fluctuate directly with the level of service activity or sales volume. For Polaris's services department, notable variable costs include parts and components used during repairs, direct labor wages for technicians paid on an hourly basis, and consumables such as lubricants and cleaning supplies. These costs tend to rise proportionally with increased service volume because more parts are required, and technicians spend more time repairing additional units.

Fixed costs remain constant regardless of service activity levels over a relevant range. Fixed costs for Polaris might include facility rent, salaries of administrative personnel, depreciation of machinery, insurance, and utilities that are not directly tied to the number of repairs performed. These costs are predictable and do not fluctuate with weekly or monthly changes in service volume, providing stability in cost structure.

Mixed costs contain elements of both variable and fixed costs. An example within Polaris’s services department could be maintenance expenses for repair machinery that include a fixed monthly fee plus additional costs that vary with usage, such as electricity consumption for machinery operation. Another example is a technician’s salary that includes a fixed base pay plus commissions or bonuses based on service volume, making it a mixed cost.

Impact of Revenue Growth on Costs

Assuming a 25% increase in Polaris’s services revenue next year, the variable costs are expected to increase proportionally. As more service contracts are sold, the demand for parts, labor, and consumables will rise, directly elevating variable costs. For instance, if parts costs currently amount to 30% of revenue, a 25% revenue increase would likely result in a similar percentage increase in parts costs.

Fixed costs, however, are generally unaffected by short-term changes in sales volume within the relevant range. As a result, even with a 25% revenue growth, fixed costs such as rent, salaried staff wages, and depreciation will remain stable unless strategic decisions or expansion plans alter their levels.

Mixed costs will change to some extent, depending on the portion of variable elements within them. For example, electricity and maintenance costs that have both fixed and variable components would increase but not necessarily at a 25% rate. The degree of change depends on the proportion of variable components in these costs.

Using the Contribution Margin Ratio to Predict Income Changes

The contribution margin ratio (CMR), calculated as contribution margin divided by sales revenue, measures the proportion of each sales dollar remaining after variable costs to contribute toward covering fixed costs and generating profit. According to Wild and Shaw (2014), the CMR provides a useful tool for predicting how changes in sales volume will impact net income, especially when fixed costs remain stable.

Given the assumption of a 25% increase in service revenues, Polaris can reasonably use the contribution margin ratio to estimate the resulting change in income. If the CMR is, for example, 40%, then a 25% increase in revenues would translate to an approximate 10% increase in net income (i.e., 0.40 x 25%). This prediction assumes that fixed costs remain unchanged and that variable costs keep pace proportionally with sales.

However, it is important to recognize potential limitations. In reality, some variable costs may not increase perfectly proportionally, and fixed costs may eventually change if growth exceeds certain levels or if strategic adjustments are made. Nonetheless, the CMR serves as a strong initial estimate to gauge the likely impact on profitability due to sales growth.

Conclusion

Understanding the classification and behavior of costs in the Polaris services department enables managers to better forecast financial outcomes amid revenue changes. Variable costs are expected to increase proportionally with sales, fixed costs will generally remain stable in the short term, and mixed costs will partially fluctuate depending on their composition. The contribution margin ratio provides a practical means to project income changes related to sales growth, provided assumptions about cost behavior hold. Strategic management of costs alongside sales forecasts can improve decision-making and profitability analysis in Polaris's expanding service operations.

References

• Wild, J. J., & Shaw, K. W. (2014). Managerial Accounting. McGraw-Hill/Irwin.
• Horngren, C. T., Sundem, G. L., Stratton, W. O., Burgstahler, D., & Schatzberg, J. (2014). Introduction to Management Accounting. Pearson.
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• Blocher, E., Stout, D., Juras, P., & Smith, D. (2019). Cost Management: A Strategic Emphasis. McGraw-Hill Education.
• Drury, C. (2017). Cost and Management Accounting. Cengage Learning.