Agriculture Reference
In-Depth Information
dollar's worth of product is sold, a 60-cent cost is incurred (including the cost of goods). At
zero sales, LCM, Inc. incurs no variable cost, so the initial total variable cost is zero. If sales
are $200,000 and each dollar of sales incurs 60 cents in variable costs, total variable costs
would be $120,000 for the period (0.60
×
$200,000). At $400,000 sales, total variable cost
$400,000) (
Figure 12.3)
.
Now, looking at variable costs per dollar of sales, if LCM, Inc. sells $200,000, its variable
cost per dollar is 60 percent. If its sales are $400,000, its variable cost per dollar is 60 per-
cent. In fact, no matter what the volume of sales, the variable cost per dollar sales remains
essentially at 60 percent, or, in other words, constant (
Figure 12.4)
when calculated as a
percentage of sales.
The key ideas presented in these graphs can be summarized as follows: (1) as sales
increase,
total fi xed costs
remain constant but fi xed cost as a percentage of sales falls; and
is $240,000 (0.60
×
300,000
250,000
200,000
Total variable costs
150,000
100,000
50,000
0
0
100,000
200,000 300,000 400,000
500,000 600,000
Sales volume ($)
Figure 12.3
Total variable costs, LCM Nursery, Inc.
100
75
50
Variable costs as a
percentage of sales
25
0
0
100,000
200,000
300,000
400,000
500,000
600,000
Sales volume ($)
Figure 12.4
Average variable costs, LCM Nursery, Inc.
