ACC M118 Lecture Notes - Lecture 8: Fixed Cost, Contribution Margin
Document Summary
Depicts relationship among cost, volume, and profit. Horizontal axis is measured in units sold. Price, total fixed costs, and unit variable costs can be identified and remain constant over relevant range. All units produced are sold no changes in inventory levels. Selling prices and costs are known with certainty. Multiple-product break-even analysis requires a constant sales mix (relative combination of products being sold by a firm). Sales mix is difficult to predict with certainty. It assumes that cost and revenue functions are linear. Firms seldom know prices, variable costs, and fixed costs with certainty. There are formal ways of explicitly building uncertainty into the cost-volume-profit model. Cost-volume-profit analysis becomes more complex with multiple products. We need to adapt the single-product formulas. Direct fixed expenses fixed costs that can be traced to each segment and would be avoided if the segment did not exist.
