3.
3 CASE STUDY
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[AO1] Identify two variable costs and two fixed costs for DAR.
Two variable costs for DAR include oil change supplies (cost of $18 per change) and oil
change direct wages paid (cost of $15 per change). Focusing on oil change supplies, this
factor is considered a variable cost because it depends on the amount of services the
company does/clients it attends rather than being fixed (stagnant) independently of
company's activities. This means that if DAR performs a larger number of oil changes they are
going to have to spend more that $18 dollars on supplies because they will need to purchase
more supplies to keep up with the demand of the service. Regarding oil change direct wages
paid, this is a variable cost because the cost will increase as an employee does more oil
changes. If they do more, the company will have to pay a larger wage, and if they do less the
wage the company pays will also reflect that.
Two fixed costs for DAR include Keith's salary ($5000 per month) and mortgage, insurance,
and property payments ($1700 per month). These are fixed costs because they are
independent of the production/selling of services of the company. It doesn't matter if they
only do 10 oil changes in a day or 50 changes, DAR will still have to pay Keith's
full/.determined salary and pay mortgage/insurance/property.
[AO2] With reference to DAR, explain the difference between fixed, variable, direct and
indirect costs.
Dunn Auto Repair is an auto mechanic shop run by Alistair Dunn which services all types of
cars and trucks. Costs and revenues are something very important for Alistair to keep an eye
on. He can calculate the average costs and revenues figures per repair that does not change
very significantly per month and create a table with a breakdown of DAR's monthly costs and
revenues. Considering this table it is possible to identify that DAR has fixed, variable, direct
and indirect costs.
Fixed costs are the costs that remain the same, regardless of the production output of a
company. Fixed costs tend to be more indirect, meaning that their attributed benefit cannot
be directly correlated to the revenue coming into the company. The indirect costs cannot be
attributed to specific cost centers, meaning they do not go to specific products. These costs
usually contribute to a company in a more general manner. Fixed costs can be seen in DAR
through their average utility expenses, marketing expenses, mortgage, insurance and
property taxes, and Keith's (Alistair's brother) salary. These are fixed costs because they do
not vary depending on production or selling of services by the company; they are very
independent of the company's actions. This goes hand in hand because these fixed costs are
also indirect costs since they do not directly reflect on the increase in revenue (if there is
any).
On the other side of the spectrum there are variable costs which are those that vary
according to the production output of a company. These costs tend to be very direct, because
you know where costs are coming from since they can be correlated to specific products.
Thus, it can be summarized that direct costs can be attributed to specific cost centers and
production units. Additionally these costs tend to be easier to manage because if you remove
or add these types of costs you will be able to see the direct effect of that in a specific
product. DAR's variable costs include oil change supplies, oil change direct wages paid,
average materials cost of repair, and average direct wage cost. These are variable because
they depend on how many services the company does. For example, if they perform more oil
changes, the company will have to spend more on supplies that they would if they did a small
amount of changes. Following this thought, it can be said that these are direct costs because
you can see their direct consequence on products. If DAR wastes more on supplies for oil
changes, they will be able to perform more oil changes and thus see a direct increase in
revenue that came from that cost.
[AO4] If Alistair does 100 oil changes and 120 repairs each month, calculate the total
monthly revenue that Alistair would make.
Considering DAR's amount of oil changes and pricing and amount of repairs and their
pricing, and disconsidering costs of each (since we are looking at total revenue and not
profit) it is possible to say that:
TR = (100 oil changes x $50) + ($300 x 120 repairs)
5000 + 36000
= $41000
Thus it is possible to conclude that if Alistair does 100 oil changes and 120 repairs each
month, the total monthly revenue that Alistair would make would be $41,000.