Question

Describe the differences in behavior of fixed costs, variable costs, semi-variable costs and step costs. Then discuss how break-even analysis and contribution margin can be useful in making business decisions.

Answer 1

Fixed costs are fixed in nature, it doesn't vary with the change in units. The total fixed cost will be same regardless of the number of units produced.

Where as variable costs are same for per unit costs, but this will change based on the number of units. So the per unit variable cost will be same, but the total variable cost will change based on the units.

Semi variable costs is mixture of both fixed cost and variable cost. Till certain level costs are fixed after that costs become variable. Step cost is kind of fixed cost, but this will change only in a certain level of production.

Break even analysis helps to identify the number of units to sold to reach a level where there is no profit or loss incurred. This point is called break even level. Management can decide how many units has to be sold in order to make the expected profits through break even analysis. Selling price also can be define through break even analysis.

Contribution margin helps to identify the exact results of a particular product or service. Contribution margin is calculated by deducting Direct costs from Revenue. contribution margin excludes fixed costs as this same regardless of the production volume.