If variable cost does not Change but output increase, what does it mean? And give its some examples
Yuvaraj from India
Yovaraj, there is very less chance of increasing output if variable cost will not change. I did not do any experiment on it. But we can see it is useful or not because we are very rational accountant and we need to calculate the break even quantity where our total cost must be equal to our total revenue.
So, I am taking the support of an example. M. Ltd manufactures one product. The unit selling prices at three days. $ 100, $ 80 and $ 50. The corresponding variable cost per unit in these three days. $ 40, $ 40 and $ 40. The proportions (quantity wise ) in which this product is manufactured and sold in three days 20%, 30% and 50%. Total fixed cost is $ 1480,000. Give the above information, you are required to work out the overall break-even quantity and the product wise break up of such quantity.
|1st Day||2nd Day||3rd Day|
|Selling Price Per Unit||$ 50||$ 80||$ 100|
|Less Variable Cost||$ 40||$ 40||$ 40||(Not Changing)|
|Contribution Per Unit||$ 10||$ 40||$ 60|
|Quantity wise proportion of one product manufactured and sold in three days.||20%||30%||50%|
|Weighted Contribution Margin= Contribution X Proportion of Quantity||$ 2||$ 12||$ 30||$ 44|
|Overall Break-Even Point Quantity = Total Fixed Cost / Overall contribution margin||$ 14,80,000/$ 44 = 33636 units|
|Production wise Break Even Quantity||33,636 X 20%||33636 X 30%||33636 X 50%|
|Production wise Break Even Quantity||6,727 units||10,091 units||16,818 units|
In above example, we find break even point units 6,727 units in first day, 10,091 units in second day and 16,818 units in third day. It means if variable cost is not changing and output is increasing, it is good sign for us. We have controlled our variable cost. But, we have to fix the level of our output where our cost will equal to our revenue. Minimum this production, we have to do at same variable cost.