Managerial Economics And Breakeven Analysis

Cost behavior refers to how specific do costs react to fluctuations in the level of the business activity (Weygandt, Kimmel, & Kieso, 2009). Cost behavior is one of the most important concepts in managerial accounting as determining how a cost will behave is critical to planning, decision making and controlling. In order to analyze cost behavior patterns and make decisions, costs are divided into 3 types; fixed, variable, and mixed costs(Smith, 2002). Breakeven analysis is one of the important tools of management decision-making. It is designed to relate the factors of total sales and total costs at a certain level of volume. However, when derived from an intensive study of price and cost behavior along with paying attention to all the factors …show more content…
Crosson & Needles, 2007). Accordingly, for a service business, mixed costs have a variable component and a fixed component; the variable costs change upon gaining or losing clients, and the fixed costs remain the same if the business gains another client or not. The mixed costs here could have included the mentioned trucks, telecommunications, and power and water. The trucks may represent definite fixed costs such as annual insurance, but also involve variables such as changing fuel prices and various amounts of use from a month to another such as distances travelled to meet certain clients, or the frequency thereof. Since this businesses usually involves traveling to client locations, trucks can become a significant mixed cost factor. Phone and Internet usage represent a mixed cost for service businesses. Businesses usually get fixed phone line fees and standard monthly rates for Internet access. Nevertheless, making lots of calls or web usage beyond a basic data limit, or making unexpected calls overseas, may result in extra charges. These make up the variable part of the total cost as they change from a month to another. Some electricity and gas companies offer a fee stabilization program for power supply. This arranges a fixed cost for all 12 months of the year. Though, the business may use less or more electricity than this amount on any given month in the year. In this respect, power charges include both a fixed and variable element, …show more content…
Given that the chain of operations has $22,500,000 of revenue from 5,000 events that they have serviced, means that the event has an average revenue of $4500. However, this is not accurate because the various events have different revenues. Moreover, the duration in which the business got this revenue should have been mentioned. Breakeven point can