If you were a start-up business, would you rather have high fixed costs and a low...

If you were a start-up business, would you rather have high fixed costs and a low contribution margin or low fixed costs and a high contribution margin? Alternatively, as you became a more mature company, which would be your better choice?

Give an example to support your conclusion.

Expert Solution

For a Start up company, the volume of sales will be lower, therefore, lower breakeven point will be beneficial so that the company is not making loss. Therefore, it will prefer, low fixed costs and a high contribution margin.

However, as a company mature, its sales will increase and to attain operating leverage, it would prefer high fixed costs and a low contribution margin. Since, as volumes increase at no further incremental cost it can achieve profits.

	Start up	Matured Company
Eg - Fixed Cost	$ 10,000.00	$ 15,000.00
Contribution per unit	$ 10.00	$ 5.00
Units to Breakeven	1,000.00	3,000.00

ekkarill92 answered 1 year ago

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