Agriculture Reference
In-Depth Information
(2) as sales increase,
total variable costs
increase but variable cost as a percentage of sales
remains constant.
Semi-variable costs
Semi-variable costs
are a third type of cost. This is a cost that is partly fi xed and partly
variable, such as the electricity costs. There is a fi xed, or minimum, charge per month, and
then the usage charges increase with business activity and most likely with sales. These
types of cost behavior can and should be considered in volume-cost relationships. A simple
way of handling semi-variable costs is to carefully estimate the fi xed portion; the amount
that is part of the cost of just being open for business, and then estimates the portion that is
incremental with each additional sale. With this allocation of semi-variable costs, volume-
cost analysis can proceed.
Special problems in cost classifi cation
There are certain situations that create special problems in classifying costs as fi xed or
variable. These are examined in the discussion below.
Incremental costs not constant
One diffi culty can be variable costs that increase incrementally with sales, but not along a
straight line. That is, as sales increase to higher levels, the additional cost for each unit
becomes increasingly smaller, or greater. This situation can be handled nicely, so long as the
exact relationships are known. The graphical or mathematical analysis becomes more com-
plicated, but the analysis can be performed and used in the same way. For example, consider
what a fi rm can do to reduce per unit variable costs. One way to do this is for the agribusiness
to secure volume discounts from suppliers. For LCM, Inc. this may mean their cost per 1,000
plant containers is reduced by 1 cent per container if the fi rm purchases over 5,000 contain-
ers from their supplier. As additional containers are used, variable costs go up, but not as
much as before the volume discount. This would result in the curvilinear relationship between
volume and variable cost depicted in
Figure 12.5.
Lumpiness
Some costs are lumpy, that is, they are fi xed within certain sales volume ranges, but then
once a certain point is reached, a whole new set of fi xed costs are incurred. For example,
when a delivery truck reaches its maximum capacity, sales cannot be increased further unless
another truck is purchased. Purchasing an additional truck suddenly increases fi xed costs,
such as depreciation, insurance, and licenses for the new truck (
Figure 12.6)
. This lumpiness
can also be included in graphical or mathematical volume-cost analysis. Again, it just
becomes more complicated, the principles do not change.
Allocating costs
With the calculation of breakeven for the entire fi rm completed, many agribusiness manag-
ers desire to take this analysis one step further. If they run a diversifi ed fi rm selling
many products, they may want information about breakeven for each of these product lines
