Finance final examination questions - Essay Example

This change causes a shift in a company's cost structure which will result in an increase in Fixed Cost and a reduction in Variable Cost. For example, in period 1 Company A employs unskilled labor which cost $10.00 per hour. However because of a cost cutting exercise by the company, the organisation decides to purchase a new machine in period 2, which will enable Variable Labor cost to be reduced by 75%. The new machine will cost $50,000 and will have a useful life of 10 Years. The following occurred: Period 1 - 1,000 Hrs $Variable Cost - Labor Cost ($10.

00 X 1,000 Hrs) 10,000.00Fixed Cost 0.00 Total Cost 10,000.00Period 1 - 1,500 Hrs $Variable Cost - Labor Cost ($10.00 X 1,500 Hrs) X 25%) 3,750.00Fixed Cost - Depreciation ($50,000/10 years 5,000.00 Total Cost 8,750.00ConclusionAn increase in a company's Fixed Cost in relation to its Variable cost (as in the above example) will ultimately lead to a fall in Total Cost. This can effectively be determined using CPV