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' existing resources such as its facilities, repair machinery, and computer systems.
Required:
1. Identify several of the variable, mixed, and fixed costs that the Polaris services department is likely to incur in carrying out its services.
2. Assume that Polaris's services revenues are expected to grow by 25% in the next year. How would we expect the costs identified in part 1 to change, if at all?
3. Based on the 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?