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# Variable costs vary in line with the level of business

activity
Fixed costs do not vary with the level of business
activity (true only up to a point)
Stepped costs: where the business reaches the level of
activity where a fixed cost must increase, the increase is
sudden
Semi-variable costs have both fixed and variable
elements
In economics, a marginal cost is the cost of one

## Marginal costing describes an approach to costing

that excludes fixed costs

## Contribution refers to the amount that is left over

after deducting variable costs from sales
The break-even point is the point at which no
transactions. For example:
It is important to understand the relationships
between the level of business activity, the
different types of cost, and profitability

## The analysis of the interaction of these

factors is Cost-Volume-Profit analysis (CVP
Add a line for sales revenue
We can work out break-even points using
the relationship between sales and
costs:

## Selling price per unit - variable costs per unit =

contribution per unit
Example: Mulberry Piggott Limited
Selling price of a raincoat = 30
Variable costs = 10 per raincoat
Expected fixed costs = 60 000

## How many raincoats must the company sell to break

even?
Mulberry Piggott (continued): target profit = 30 000
Mulberry Piggott Limited
Mulberry Piggott Limited
If projected sales of 4500 are realistic, and break even point is
3000 units, the margin of safety is:
Decision rule: if an order or a contract at a
special price would produce a positive
contribution to fixed costs, the order should
be accepted
BUT
there are likely to be other factors relevant to
the decision
If a business is considering major increases in
activity levels it must take into account any
likely increases in fixed costs

## If incremental revenues exceed incremental

costs, the project should be accepted
Example: Spindrift & Schooner Limited
Estimated effect of extending a boatyard
Limiting factors are constraints on sales or
production, for example:
a product may require specialist labour for
which there is a shortage
a product may require a material that is in
short supply
Example: Crosthwaite and Crosby Limited
Cost structures for three products
Example: Crosby and Crosthwaite Limited

## Product B gives the highest contribution,

but labour is scarce. Which product
provides the highest contribution per
unit of limiting factor?
Example: Crosby and Crosthwaite Limited

## Product A gives the highest contribution per unit of limiting

factor
Assumes that variable costs increase at a
steady rate - assumption may not be valid
Very few costs are truly variable
Fixed costs remain fixed only up to a point
Analysis more difficult in multi-product firms
There may be other factors to take into
account