# Cost Behavior Pattern Case Study

996 Words2 Pages

What is a cost behavior pattern?
A cost behavior pattern is the capacity to comprehend how costs change when there is a change in an organization's level of activity. In other words, to successfully predict how organizations’ future profit will be determined, organizations have to know the behavior of cost which will take place as a result of changes in activities such as sales volume (Averkamp, 2017). Cost behavior pattern, similarly refers to the way different types of production costs change when there is a change in the level of production. Understandably, some costs varied proportionately with the changes in the level of activity and these costs are referred to as variable costs. Other costs are often not affected irrespective of changes …show more content…

As candidly asserted, fixed costs are those which do not change with the level of activity within the relevant range. Irrespective of what happens in an organization’s production capability, these costs will incur. A valid example is a manufacturing company who will undoubtedly meet its rent expenses or obligations whether its units of production increases or decreases. The rent being paid for a production facility is not determined by the level of activities such as the volume of goods sold, and the volume of goods manufactured. In the understanding of fixed costs, let’s say, for instance, Apple Inc. has a fixed cost of \$200,000 per month, if unfortunately, only ten iPhone are produced in that month, the fixed cost of \$200,000 will incur and if, by chance the company sold 50,000 pieces of iPhones, the fixed cost will not be affected. So it is obvious that fixed costs remain unchanged in total as the level of activity changes (Heisinger & Hoyle, …show more content…

In terms of a company’s revenue and costs, what does it mean when firm breaks even?
In terms of revenue and costs, the term break even represents revenue that is equal to cover total costs (both variable and fixed costs) to the company. In other words, the net profit or loss of the firm is zero. The formula, therefore, to compute the breakeven is Breakeven point =Revenue - Total Costs (fixed + variable).
Discuss the relationship between a contribution margin and a break-even analysis.
Contribution Margin is nothing but the amount of money that a firm has to cover its fixed costs after it pays off all the variable cost components. Contribution margin, in other words, is defined as “Sales revenue left over after deducting variable costs from sales” (Heisinger & Hoyle, 2012, p. 348).The formula to reach a contribution margin is Revenue - Variable costs = Contribution margin. On the other hand, a break-even analysis has to do with the calculation and examination of the margin of safety for a company based on the revenues collected and associated