Agriculture Reference
In-Depth Information
For example, fuel cost associated with delivering products is variable because it is incurred
automatically when and only when product is actually sold and delivered. But management
usually can do little to control it. On the other hand, advertising costs are generally control-
lable, but they do not vary directly with sales. Theoretically at least, advertising causes sales,
which is the opposite situation from a variable cost. Once the advertising expenditure is
committed, whether sales result or not has nothing to do with paying the advertising bill.
Thus, advertising is a fi xed cost, even though it is controllable.
Perhaps a graphical illustration can further clarify these important fi xed and variable cost
concepts. Assume the LCM Nursery, Inc. has total fi xed costs or overhead, as it is sometimes
called, of $200,000 per year.
Fixed costs
Fixed costs are constant regardless of the volume sold during the period. If LCM, Inc. opens
for business but has no sales at all, then its total fi xed costs are $200,000. If its sales volume
is $200,000, its fi xed costs remain at $200,000. If its sales volume is $500,000, its fi xed costs
are still $200,000. The horizontal line in Figure 12. 1 shows that regardless of sales volume,
fi xed costs will remain at $200,000.
Now, look at fi xed costs as a percentage of sales. If LCM, Inc. sells only $200,000
worth of nursery products during the year, its fi xed cost per dollar of sales is 100 percent
($200,000 fi xed costs ⁄ $200,000 sales
100). If sales are $400,000, fi xed costs drop to 50
percent of sales. If sales are $500,000, the fi xed cost percentage drops to 40 percent of sales.
×
Plate 12.2 Nursery
Some costs of doing business for LCM Nursery are fi xed, and other costs are variable. Photo
courtesy of USDA.
 
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