To grow the small businesses in the market, it is always necessary to know about the variable costs and fixed costs. It is a fixed cost analysis that is necessary to do. It helps businesses to know about the types of expenses and production that will lead to the output. Now, first, anyone has to know the formula of variable costs and fixed costs to help them.
In small businesses, fixed cost is the consistent cost, which means that, will remain the same no matter what happened. But in variable cost, the case is different. It fluctuates with the various levels of output and production.
The main benefit of fixed costs is that any business that can maintain its fixed cost will bear more economies of scale. When making the business plan, four different types of costs are went under consideration. Those are necessary to maintain the output coming from the business. These four costs are Direct Costs, Indirect Costs, Fixed Costs, and Variable Costs.
There is some example of fixed costs to know about the things that never change with the production or output. Management Salaries, Insurance Premiums, Property Taxes, and Interest Payments fall in the fixed costs category. Mostly small business uses the average fixed cost for the production to do effectively. The formula of average fixed cost for the calculation are as follows:
Average fixed cost = total fixed cost/ number of units produced.
The output of any business is the sum of fixed costs and variable costs. That provides the enterprise the information on where they can stand in the production unit.
The break-even point helps to tell about the benefit of unit produced to provide to the business. It informs that every unit having a level above the break-even level will generate profit for the business.
The break-even formula is:
Break-even points in unit= Fixed costs / (sales price per unit – variable cost per unit).
That Break-even point helps to endure the condition where the business and the production of the units lies. Hence, helps to increase the actual performance of the production to get more output.
Written by: Maryem
Reported by: Zarrish