Change in Fixed Costs
Introduction
Here we will look at the effects of changes in selling price, fixed costs, and variable costs on the net income and break-even point.
The use of graphs can also help us with break-even analysis.
We usually call the graph showing the total revenue and the total cost graphs together a break-even chart.
This chart is an easy visual way to analyze the financial position of a business for different number for units
sold (sales volume) or produced (volume of output).
We can see at a glance the amount of profit or loss that is generated for different levels of sales or production.
Change in Fixed Costs
A change in fixed costs will cause a change in the total cost equation.
An increase in fixed costs will cause an increase in the total costs, and the TC graph will shift upwards.
A decrease in the fixed costs will cause a decrease in the total costs, and the TC graph will shift downwards.
'Shift' means move up or down without changing slope.
The higher the fixed costs, the higher the level of the break-even point and the lower the profit level provided that
the other variables stay the same.
Example: The graph shows the effect of an increase in the fixed costs. TR is the total revenue graph as shown in the graph below:
The TC1 graph has fixed costs of $3000. The variable costs (slope of line) = $30 per unit. Its equation is TC1 = 30Q + 3000.
The TC2 graph has fixed costs $5000. The variable costs (slope of line) = $30 per unit. Its equation is TC2 = 30Q + 5000.
The break-even point is higher for TC2. Note that the variable costs are unchanged (same slope for both total cost graphs).
The TC3 graph has fixed costs $2000. The variable costs (slope of line) = $30 per unit. Its equation is TC3 = 30Q + 2000.
The break-even point is lower for TC3. Note that the variable costs are unchanged (same slope for both total cost graphs).
Please access the following link to do a similar exercise about change in fixed price:
Change in fixed price with solution
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Date of last modification: March 19, 2019