What is a cost behavior pattern?
A cost behavior pattern is the capacity to comprehend how costs change when there is a change in an organization's level of activity. In other words, to successfully predict how organizations’ future profit will be determined, organizations have to know the behavior of cost which will take place as a result of changes in activities such as sales volume (Averkamp, 2017). Cost behavior pattern, similarly refers to the way different types of production costs change when there is a change in the level of production. Understandably, some costs varied proportionately with the changes in the level of activity and these costs are referred to as variable costs. Other costs are often not affected irrespective of changes
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As candidly asserted, fixed costs are those which do not change with the level of activity within the relevant range. Irrespective of what happens in an organization’s production capability, these costs will incur. A valid example is a manufacturing company who will undoubtedly meet its rent expenses or obligations whether its units of production increases or decreases. The rent being paid for a production facility is not determined by the level of activities such as the volume of goods sold, and the volume of goods manufactured. In the understanding of fixed costs, let’s say, for instance, Apple Inc. has a fixed cost of $200,000 per month, if unfortunately, only ten iPhone are produced in that month, the fixed cost of $200,000 will incur and if, by chance the company sold 50,000 pieces of iPhones, the fixed cost will not be affected. So it is obvious that fixed costs remain unchanged in total as the level of activity changes (Heisinger & Hoyle, …show more content…
In terms of a company’s revenue and costs, what does it mean when firm breaks even?
In terms of revenue and costs, the term break even represents revenue that is equal to cover total costs (both variable and fixed costs) to the company. In other words, the net profit or loss of the firm is zero. The formula, therefore, to compute the breakeven is Breakeven point =Revenue - Total Costs (fixed + variable).
Discuss the relationship between a contribution margin and a break-even analysis.
Contribution Margin is nothing but the amount of money that a firm has to cover its fixed costs after it pays off all the variable cost components. Contribution margin, in other words, is defined as “Sales revenue left over after deducting variable costs from sales” (Heisinger & Hoyle, 2012, p. 348).The formula to reach a contribution margin is Revenue - Variable costs = Contribution margin. On the other hand, a break-even analysis has to do with the calculation and examination of the margin of safety for a company based on the revenues collected and associated
Table C projects the break even analysis in both units and dollars as a basis for further projections. As seen in Table C substantially larger sales are required to break even.
Keith must be aware of what their breakeven point is. Mr. Davison stated that Ben E. Keith does not monitor the number of cases they must sell to ensure they reach their breakeven point as there is not a standard cost or sales price per case, but that they do use several other metrics to gauge their breakeven point. They simply use pre-calculated thresholds as a guideline on an order by order basis. For instance, the ERP system at Ben E. Keith reflects the cost of each item in their inventory. When a salesman receives an order from his customers, the price he charges them is left to his discretion. The rule of thumb is that the salesman can sell some items at a low margin and others at a higher margin as long as the overall gross profit is at least 15%. They have found that if all orders average a 15% gross profit they will be profitable. A second metric that they use to ensure profitability is that they require each order to generate a minimum profit of $100. This is what they consider to be their breakeven threshold, which covers all of their costs and allows them to enjoy at least a modest
Activity-based costing (ABC) is a costing method that is usually used as a supplement to a company’s usual costing system, and is therefore used for internal decision-making. It is designed to inform managers of costing information for decisions (strategic and others) that potentially affect capacity and consequently “fixed” as well as variable costs. In addition, ABC can also be used to pinpoint activities that would benefit from process improvements.
...The three key learning points that are identified are breakeven, variable cost, and fixed cost will be of importance in the decision making because Mr. Shultz needs to know how many items he must sell before he can see the profits of each store. Variable cost is important because cost affect profitability and details the management strategies to enhance profits. Finally fixed costs are important because it must be paid irrespective of sales volumes. Fixed costs include, but are not limited to, overheads (rent, insurance, and such) but can include direct costs such as payroll. The overall importance of breakeven, variable cost and fixed cost are equally important to any business decision making.
In further analyzing what effect sales commissions have on this scenario, a break-even analysis is the next calculation to determine. The break-even analysis is as follows:
The break-even point in units for Lululemon’s is the number of jackets that needs to be produced in order to cover the company's fixed and variable expenses.
Do a further analysis of production costs to improve efficiencies. If all else fails, either increase prices to the point where the contribution margin is positive, or drop the customer. 3. What is the difference between a'smart' and a Managerial Implications and Analysis Limitations Managerial Implications: What are the benefits of Moving from a traditional cost accounting system to ABC can reveal hidden costs and hidden profits on the basis of the identified activities (i.e. customers, orders, etc. ). Treating overhead costs as "fixed" can cause an unfair and highly misleading distribution of overhead costs, which are in fact variable.
As a production manager, it is important to understand the practical limits of this type of cost reduction and the implications of applying such a strategy. As the organization reaches the practical limit of this strategy, it may not have the flexibility or capability to continue to innovate and make improvements in production efficiency. The decision to apply a learning curve strategy to any production effort relies on comparing the potential gains in production cost reduction with the eventual loss in the ability to improve and innovate. Remember that learning curves differ from company to company, from product to product and from industry to industry and can be very
Fixed cost is not affected by the changes in the sales, they have slight relationship to the business and they do not change considerably when the sale increase or decrease. Fixed cost is set for particular period of time and changes occur during the specific time. Since, fixed cost does not change directly some of the examples of fixed cost are insurance premium, real estate taxes etc. For example, ‘an increase in the cost of insurance premiums may be attributable to an insurance company’s perception of increased risk associated with higher volume. Even though the increase in insurance cost is somehow related to an increase in volume, the cost of insurance is still considered a fixed cost’ (Tiffin, 2007). Other component of cost is variable cost changes frequently do not haves specific set period. Variable costs can be aptly defined as," which increase directly in proportion to the level of sales in dollars or units sold”. Depending on the type of business, some examples would be cost of goods sold, sales commissions, shipping charges, delivery charges, and costs of direct materials or supplies, wages of part-time or temporary employees, and sales or production bonuses.
The break-even point is located in the intersection between the total expense line and the revenue line. As it is shows, Cosmo-cosmetics operates at a sales Volume to the right of the break-even point (point A), this means that it would earn a profit because the revenue line lies above the expense line over this range ?Profit area?
Every company has some kind of Revenue and they all have costs that are associated with running the company. It is also true that if a company wants to increase their Revenue, their costs will increase too. It is every company’s goal to maximize revenue and either through Production or Services, and minimize cost. These things are easy to figure out, but actually identifying the production and figuring out how it will increase or decrease with change is very difficult.
Therefore, the amount of profit obtained is somewhat arbitrary. However, cash flow is an objective measure of cash and it is not subjected to a personal criterion. Net cash flow is the difference between cash inflows and cash outflows; that is, the cash received into the business and cash paid out of the business (Fernández, 2006). Whereas, net profit is the figure obtained after expenses or cost of resources used by the business is deducted from revenues generated from the business operations activities. Nonetheless, the figure for revenue and cash are not entirely cash, some of the items may be sold on credit and some of the expenses are not paid up
To breakeven, we would have to sell 267,857 units. We plan on selling the Galaxy Note 8 at a price of $499 which is cheaper than our previous phones in the Galaxy Note line. Consumers aren’t going to purchase a new smartphone if the price is going to be in the same range of the Galaxy Note 7. So we are going to be selling the smartphone at a discount. We are using odd-even pricing for the Samsung Galaxy Note 8. It gives a sense to the consumer that they will be purchasing the Samsung Galaxy Note 8 at a bargain, instead of using the even pricing method. The cost to make the smartphone itself is around $275. There will be a picture below that will explain the details of the build of the smart phone. For the breakeven I subtracted the Total Cost from the Total Revenue. The profit for year 1 will be $1 billion dollars, I subtracted the total revenue for year 1, which was $1.06 billion and subtracted that number by the fixed cost amount of $60
The first way is achieving a high turnover in service for example a restaurant that turns tables around very quickly, or an airline that turns around flights very fast. This approach means fixed costs are spread over a larger number of units of the product or service. This will result in a lower unit cost. Large businesses do this to create an entry barrier to prevent potential competitors from competing with their product. As they are unable to match the scale necessary to match the large firms low costs and prices.
Activity-based costing (ABC) is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” as well as variable costs. Activity-based costing is mostly used for internal decision making and managing activities while traditional costing method is used to provide data for external financial reports. Most organization uses activity-based costing as an addition system for using traditional absorption costing as sometimes the traditional cost system misleads the product’s profitability. In a company, there are many products on sale, if one product is sold at a high price with low product margin and a product with high product margin at a low price, it may result in a loss. In addition, due to the reason that cost drivers and enterprises business may change, activity-based costing analysis also needs to be revised periodically. This amendment should be prompted to change pricing, product, customer focus and market share strategy to improve corporate profitability.