How does a fixed cost per unit affect profit?
How does a fixed cost per unit affect profit?
Homework Answers
Answer
FIXED COST PER UNIT EFFECTS IN PROFIT
If the production increase fixed cost per unit decrease, it will leads to increase profit. If the production decrease fixed cost per unit increase, it will lead to decrease the profit.
For example
Fixed cost = $670
Selling price = $27
Variable cost = $5
1 COMPANY produced and SOLD 70 UNITS
Fixed cost per units = 670 / 70 = $9.57
Calculation of profit
| Particulars | $ |
| Sales (70 × 27) | 1,890 |
| Less variable cost (70 × 5) | 350 |
| Contribution margin | 1,540 |
| Less fixed cost | 670 |
| Profit | 870 |
2 IF PRODUCTION INCREASED TO 90 UNITS
Fixed cost per unit = 670 / 90 = $7.44
Calculation of profit
| Particulars | $ |
| Sales (90 × 27) | 2,430 |
| Less variable cost (90 × 5) | 450 |
| Contribution margin | 1,980 |
| Less fixed cost | 670 |
| Profit | 1,310 |
3 IF PRODUCTION IS DECREASED TO 55 UNITS
Fixed cost per unit = 670 / 55 = $12.18
Calculation of profit
| Particulars | $ |
| Sales (55 × 27) | 1,485 |
| Less variable cost (55 × 5) | 275 |
| Contribution margin | 1,210 |
| Less fixed cost | 670 |
| Profit | 540 |
The above calculations clearly indicate that the production increase from 70 unit to 90 units, it will lead to fixed cost per unit decrease from $9.57 to $7.44 and the profit increase from $870 to $1,310.
If the production decrease from 70 units to 55 units, it will lead to fixed cost per unit increase from $9.57 to $12.18 and the profit decrease from $870 to $540.
In short the change in fixed cost per unit will significantly effects the profit. If Fixed cost per unit increase profit decrease and fixed cost per unit decrease profit increase.
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