fixed cost vs variable cost
TRANSCRIPT
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Concept
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FixedCost
Variablecost
Total
cost
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Unit fixed costs, called average fixed costs (AFC),decline with volume
Example: Rent
Fixed
Variable costs by contrast change in relation to theactivity of a business
Example: Supplies
Variable
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Points Fixed Costs Variable Costs
Units produced Do not change with changes inunits produced
Change with every unit changein production
Basis Based on passage of time(Annual, Monthly etc.)
Based on number of unitsproduced
Control by Management Beyond management controlin the short-term
Can be controlled bymanagement by changing
production levelsVariability Variable in the long term Variable in both short term &long term
Examples ent, Mortgage Payments etc. aw Material Cost, Electricityetc.
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Committed Fixed Costs:
Fixed costs caused by purchase of capacity producing assets such as
plant and equipment are called committed costs. Company has committed itself to incur such costs my making long
range decisions which will extend several years into the future.
E.g.:Depreciation, rent, insurance, etc
Discretionary Fixed Costs:
These are also known as programmed costs or managed costs.
Costs caused by management policy decisions to undertakeactivities like R&D, advertising, etc are called discretionary fixedcosts.
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SC NARIO 1
Fixed cost = 500
Unit Variable Cost= 10 Items sold= 100@ 50
Sales=5000
Variable cost= 1000
Total cost= 1500
rofit= 3500
Unit Profit=35
SC NARIO 2
Fixed cost = 500
Unit Variable Cost= 10 Items sold= 200@ 50
Sales=10,000
Variable cost= 2000
Total cost= 2500
rofit= 7500
Unit Profit=37.5
Sales
Increases
Unit fixed
Cost Reduces
UnitProfit
Increase
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Case Study
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TheDK izza House has provided withthe following information :
Costs
Monthly sales
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Monthly sales units 3,000 6,000 9,000
Cost of food 35000 50000 60000
Supplies 6000 12000 18000
Salaries 8000 14000 20000
Utilities 3600 4200 4800
Other operating costs 15000 30000 45000
Advertising and promotion 4000 4000 4000
Telephone 3000 5000 7000
Electricity 4000 6000 8000
Repairs and Maintenance 1000 1200 1400
Vehicle Rent 2000 4000 6000
Fuel 1000 2000 3000
Building rent 10000 10000 10000
Insurance (prepaid) 5000 5000 5000
Depreciation 2000 2000 2000
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Identify each cost as variable, fixed or
mixed1
Identify the committed and discretionaryfixed costs; suggest which of these couldbe cut down in case of slow down/pricewar from competition.
2
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Monthly sales units 3,000 6,000 9,000
Cost of food 35000 50000 65000
Supplies 6000 12000 18000
Utilities 3600 4200 4800
Other operating costs 15000 30000 45000
Building rent 10000 10000 10000
Depreciation 2000 2000 2000
Develop an equation to estimate total cost at various levelsof activity given that only following costs are considered:3
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Pr j ct t tal c st it t ly sal s f8, its c si ri t c sts i (3)
ly.4
If a r al Pizza s lls at Rs. 5 / pizza,calc lat its c trib ti ar i p r it if3 pizzas ar s l c si ri c sts i (3)
ly.
5
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Case Solution
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y = 1500x + 2000
0
1000
2000
3000
4000
5000
6000
7000
3000 6000 9000
Cost of Food
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y = 600x
0
200
400600
00
1000
1200
14001600
1 00
2000
3000 6000 9000
Supplies
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y = 60x + 300
0
100
200
300
00
500
600
3000 6000 9000
Utilities
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y = 1500x
0
500
10001500
2000
2500
3000
35004000
4500
5000
3000 6000 9000
Operating Cost
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y = 1000
0
200
400
600
800
1000
1200
3000 6000 9000
Rent
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y = 200
0
50
100
150
200
250
3000 6000 9000
Depreciation
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Monthl s l s nitsFix d V ri bl B h viour
Cost of food 20000 15000 Mixed
Suppli s 0 6000 Variable
Salari s 2000 6000 Mixed
Utiliti s 3000 600 MixedOth r op rating costs 0 15000 Variable
Adv rtising and promotion (discr tionar ) 4000 0 Fixed
T l phone 1000 2000 Mixed
Electricit 2000 2000 Mixed
Re
pa
irsan
dMa
in
tenan
ce
(co
mmitte
d) 1000 0 FixedVehicle Rent 0 2000 Variable
Fuel 0 1000 Variable
Building rent (committed) 10000 0 Fixed
ConsultingServices (discretionar ) 2500 0 Fixed
Insurance (prepaid) (committed) 5000 0 Fixed
Depreciation (committed) 2000 0 Fixed
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Sales Total Costs
9,000 14,4 0
3,000 7,160
6,000 7,320
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Monthly sales units 8,000
Cost of food sold 6,000
Supplies 1,600
Utilities 460Other operation costs 4,000
Building rent 1,000
Depreciation 00
Total 13,260
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Variable C. ./unit =
49600/3000 =
Rs. 16.53
S. . / unit =
Rs. 50
Contribution margin / unit =
S. . Variable C. .=
Rs. 33.47
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