BU121 Lecture Notes - Fixed Cost
Document Summary
Tool to: assess risk in decision when doing something new. When fixed costs covered by contribution from sales. = fc / contribution per unit or % margin. Decide when to change strategy start new approach. Determine decision point above become more profitable. When incremental fixed costs cover incremental contribution. Make decisions that affect costs and/or volume fine-tuning a strategy. Total incremental contribution > incremental fixed and negligible negative qualitative impact. Abc company currently sells 400 units of a product at /unit and variable costs are /unit . Contribution per unit = - = /unit total $ contribution = /unit x 400 units = ,000. Better off: quantitatively, qualitatively, ,000 x 40% contribution = ,000 additional contribution, vs ,000 increase in fixed costs, yes it is better. - = contribution per unit. X 350 units = ,750 total contribution. Vs ,000 additional contribution of ,750.
