DescriptionCosts, volume, and profits are connected. Companies categorize their costs as either variable or fixed. Because fixed costs remain unchanged regardless of the company's sales activity, the company must cover its fixed costs to prevent producing products without making a profit. To do this, they calculate the company's break-even point. The break-even point shows how much a company must sell, and at what price, to cover its costs. The company's sales mix, which is how much each individual product contributes to its total sales, also affects its plans because those products vary in profitability.
At A Glance
- Costs, volume, and profit are all related.
- The income that remains after variable costs are paid is called the contribution margin.
- If a company is not able to cover fixed costs, then it is not making a profit. Companies calculate a break-even point to find out when they will begin to make a profit.
- The break-even point can be calculated in terms of both units and revenue.
- The way a company organizes its costs is called its cost structure.
- The cost structure is linked to stable profits.
- Commissions are variable costs that are not part of the manufacturing process.
- Commissions need to be recorded differently from variable manufacturing costs.
- The products and services that make up a company's total sales will affect how it structures its sales cost centers.