Select Page

Effect of Changes In Fixed Costs

A firm may be confronted with the situation of increasing fixed costs. An increase in the total budgeted fixed costs of a firm may be necessitated either by external factors such as an increase in property taxes, insurance rates, factory rent and so on, or by a managerial decision of an increase in salaries of executives. More important than this in the latter category are expansion of the present plant capacity so as to cope with additional demand. The increase in the requirements of fixed costs would imply the computation of the following

(a) Relative break-even points

(b) Required sales volume to earn the present profits

(c) Required sales volume to earn the same rate of profit on the proposed expansion program as on the existing ones.

The effect of the increased FCs will be to raise the BEP of the firm. Assume the management of SV Ltd decides a major expansion program of its existing production capacity. It is estimated that it will result in extra fixed costs of Rs 8.000 on advertisement to boost sales volume and another Rs 16,000 on account of new plant facility.

1

Effect of Changes In Fixed Costs

TABLE

Effect of Changes In Fixed Costs

Effect of Changes In Fixed Costs

[vfb id=1]

Share This