Question

Consider and discuss the interactions between rising or falling costs, the quantity and profitability of products in a business environment. How does variable cost changes affect the contribution margin and profit as opposed to the changes in fixed costs? Provide life examples of how you see these costs in your personal life or business.

Answer 1

• We can determine profit of the business organisation in following manner :-

Income from operation = xxxx

Less:- Variable Cost = xxxx

Contribution = xxxx

Less:- Fixed Cost = xxxx

Profit = xxxx

• Therefore, fixed and variable both cost plays an important role in determining the profit of the organisation. And to maintain profit in organisation we have to be aware with break even point of business as well, where there is no profit or loss for the organisation that means fixed and variable cost is equivalent to income from operation.
• Every increase or decrease in fixed and variable cost will affect the profit of organisation.
• Variable cost is directly related to production means when our production increases then variable cost also increased proportionately and vice-versa.
• On the other hand, fixed cost has no relation with production, it is fixed in nature that means it will continue to incur even if there is no production.
• To maintain the profitability of organisation, we must have to be aware with our break even point so that we can manage both of these variable and fixed cost.
• In our personal life as well, we can avoid few expenses of necessity like food and all. We can treat all those expenses as fixed in nature which can not be avoided.