Question

Fixed cost is fixed in total but varies on a per-unit basis. Does this mean that as your sales increase, your contribution towards covering fixed costs and earning a profit increases? Beyond a range that sales and variable costs increase, fixed costs may change.

Answer 1

Fixed Cost: A fixed cost is a cost that does not change with an increase or decrease in the amount of goods or services produced or sold. Fixed costs are expenses that have to be paid by a company, independent of any specific business activities.

Generally Fixed costs reamain same fixed upto a certain level of output. This means total amount of fixed cost remains same but per unit fixed cost reduces as the quantity of output increases.

Break Even Point:The breakeven point is the level of production at which the costs of production equal the revenues for a product.

Generally at Break Even Point the business is able to recover total of Variable and Fixed costs it incurred.

That means at Break Even Point

Contribution = Fixed cost.

From above we can conclude that as quantity sold increases the contribution towards Fixed costs and earning profit increases.

Note: Fixed costs remain fixed upto a certain limit of activity level. If the quantity produced exceed the limits then the fixed costs to be incurred also changes, this is known as STEP FIXED COST.