Wednesday, May 14, 2008

Variable Cost Ratio Example

There is a company that manufactures toilet and sells its product for $20 per vase. The companies variable cost ratio is 60% and it has fixed costs that total $32,000. If fixed costs increase by 40% this year, how many more units is the company required to sell in order to generate the same operating income as under the current operating conditions?

Variable Cost Percent = Variable Cost/Sales Revenue
VC% = VC/SR

60% = VC/20
Variable Costs (VC) = 12

Contribution Margin= Sales Revenue- Variable Cost
CM = SR – VC

CM = 20 – 12
Contribution Margin (CM) = 8

Increase in Fixed Costs (FC) = $32,000 x .4 = 12,800

12,800/8 = 1,600 more toilets are needed to be produced

Additional Accounting Examples:

Difference between Fixed Cost and Variable Cost
Relationship between Variable and Absorption Costing
Applying Manufacturing Overhead

Fixed Costs and Variable Costs Examples

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