Change with units of production variable cost changes

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Change with units of production Variable Cost Changes with units of production Stays the same per unit Mixed Costs – Has both a variable and fixed component Example: Utilities: pay a flat fee for getting electricity plus per wattage charge. Land Line: pay flat fee for service and $.05 per call. All this is true for a certain range of transactions – RELEVANT RANGE. Break Even Analysis: For manufacturing or service companies sometimes it makes sense to analyze how many UNITS you must sell to cover all your fixed and variable costs. This is called break even analysis. You can also analyze it by including a set profit target too. Sales – variable costs – fixed costs = net income Set net income to zero (Sales per unit * units) – (variable costs per unit * units) – fixed costs = 0 If you set net income = 0 that tells you the break even point. So break even analysis: fixed costs/contribution margin per unit = break even units! Sales needed to reach specific profit (fixed costs + desired profit)/contribution margin per unit = number of units to sell to 11-2
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Chapter 11 - Cost Behavior, Operating Leverage, and Profitability Analysis make certain profit Margin of Safety The gap between budgeted sales and the break-even point is the margin of safety. This is expressed in terms of a percentage. (Budgeted sales – breakeven sales)/budgeted sales = % This will give the company an idea of how much budgeted sales can decrease before they fall below the break even point. Applying Cost Behavior Concepts to Business Decisions practice problem 1: Art On Tour, Inc. (AOTI) contracts with artists to exhibit their works to the public. AOTI has agreed to pay a well known artist a $20,000 commission for the right to exhibit his work for one month. Required Part a – Identifying Cost Behavior 1. Determine the total commission cost and the commission cost per person if 1,000, 2,000, or 4,000 people attend the exhibition . Is the commission cost fixed or variable? Fixed cost 1,000 people attend 2,000 people attend 4,000 people attend Commission per unit 20,000 / 1,000 = $20 20,000 / 2,000 = $10 20,000 / 4,000 = $5 2. AOTI provides patrons with books illustrating the artist’s work.
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