Change in Variable 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 Variable Costs
A change in the variable costs will cause a change in the total variable costs and the total cost equation.
An increase in the variable costs will cause an increase in the total costs;
the TC graph will have a greater slope. A decrease in the variable costs will cause a decrease in the total costs;
the TC graph will have a smaller slope.
The higher the variable 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 variable costs. TR is the total revenue graph as shown below:
The TC1 graph has a slope of 30. The variable costs (slope of line) = $30 per unit. Its equation is TC1 = 30Q + 3000.
The TC2 graph has a slope of 40. The variable costs (slope of line) = $40 per unit. Its equation is TC2 = 40Q + 3000.
The break-even point is higher for TC2. Note that the fixed costs are unchanged (same intercept on the vertical axis).
The TC3 graph has a slope of 20. The variable costs (slope of line) = $20 per unit.
Its equation is TC3 = 20Q + 3000. The break-even point is lower for TC3.
Note that the fixed costs are unchanged (same intercept on the vertical axis).
Please access the following link to do a similar exercise about change in variable cost:
Change in variable cost with solution
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Date of last modification: March 19, 2019