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Variable cost are the same per unit, while the total variable cost changes in
proportion to changes in the activity base.
Example of variable cost, along with their related
bases for various of business:
2. Fixed Cost – are cost that remain the same in
total dollar amount as the level of activity
changes.
Example of fixed cost and their activity bases for a variety of business as follows:
3. Mixed Cost – has characteristic of both a
variable and a fixed cost.
Example:
Assume that Simpson Inc. Manufactures sails, using
rented machinery. The rental charges are $15,000 per
year, plus $1 for each machine hour used over 10,000
hours. If the machinery is used 8,000 hours, the total
rental charge is $15,000. If the machinery is used 20,000
hours, the total rental charge is $ 25,00.
Total Cost = (variable cost per unit X units of production) + Fixed cost
Highest Level:
$61,500 = ($15 X 2,100 units) + Fixed Cost
$61,500 = 31,500 + Fixed Cost
$30,00 = Fixed Cost
Lowest Level:
$41,250 = ($15 X 750 units) + Fixed Cost
$41,250 = 11,250 + Fixed Cost
$30,000 = Fixed Cost
Cost Volume Profit Relationship
Is the systematic examination of the relationships
among selling prices, sales and production
volume, cost, expenses, and profits.
Provides management with useful information for
decision making.
For example, cost-volume-profit analysis may be
used in setting selling prices, selecting the mix
of products to sell, choosing among marketing
strategies, and analyzing the effects of changes
in cost on profits.
Contribution Margin Concept
The excess of sales revenues over variable cost.
To illustrate, the income statement of Lambert Inc.
has been prepared in a contribution margin format as
shown below
Sales $1,080,000
Variable cost ($1,080,000 x 60%) 648,000
Contribution margin (($1,080,000 x 40%) $ 432,000
Fixed cost 300,000
Income from operations $ 132,000
Unit Contribution Margin
is the dollars from each unit of sales available to cover
fixed costs and provide income from operations.
Useful for analyzing the profit potential of proposed
projects.
For example:
If Lambert Inc.