Answer to Question #256111 in Accounting for donnie

Question

How would you define fixed and variable product costs? How are these costs used in determining the contribution margin of different products manufactured and sold? What relationship do you see between these cost behaviors as they relate to the volume of sales/production and profitability?

Answer 1

Solution:

Fixed costs refer to those costs that do not vary with the volume of production. They remain the same regardless of whether goods or services are produced or not.

Variable costs refer to those costs that vary the production volume. The more the production, the higher the variable costs, and vice versa.

 

The variable costs are used to determine the contribution margin.

The contribution margin is calculated as the difference between a product's sale price and the variable costs associated with its manufacturing and sales process.

The contribution margin is the portion of a product's sales revenue that is not consumed by variable costs and thus contributes to the company's fixed costs being covered.

 

Fixed costs remain constant regardless of sales volume. Profit grows as sales grow because it is the difference between sales and total expenses. Profit always rises in direct proportion to sales, as long as variable costs per unit do not exceed sales per unit. Variable costs, on the other hand, vary with production volume.