Marginal cost is the cost of the next unit or one additional unit of volume or output.
To illustrate marginal cost let’s assume that the total cost of producing 5,000 units is $25,000. If you produce a total of 5,001 units the total cost is $25,005. That would mean the marginal cost—the cost of producing the next unit was $5.
The reason that the marginal cost was $5 instead of the previous average cost of $5 that some costs did not increase when the additional unit was produced.
Variable cost
A cost of labor, material or overhead that changes according to the change in the volume of production units. Combined with fixed costs, variable costs make up the total cost of production. While the total variable cost changes with increased production, the total fixed costs stays the same.
Fixed cost
A cost that does not vary depending on production or sales levels, such as rent, property tax, insurance, or interest expense.
Semi variable cost
Production cost that remains fixed up to a certain volume, after which it becomes variable, the total of which responds less than proportionately to changes in volume of activity, or which has both a fixed cost element (such as monthly rental for a phone line) and a variable cost element (call charges). Also called mixed cost
Contribution
Amount left over after direct (variable) costs are deducted from the sales revenue. Also called gross income, this sum pays for indirect (fixed) costs and contributes to net income.
What is break-even(CVP) analysis?
A calculation of the approximate sales volume required to just cover costs, below which production would be unprofitable and above which it would be profitable. Break-even analysis focuses on the relationship between fixed cost, variable cost, and profit.
Calculating the break-even point
Point in time (or in number of units sold) when forecasted revenue exactly equals the estimated total costs; where loss ends and profit begins to accumulate. This is the point at which a business, product, or project becomes financially viable.
Margin of Safety
Excess of actual sales revenue over the break even sales revenue, expressed usually as a percentage. The greater this margin, the less sensitive the firm to any abrupt fall in revenue.
Break-even charts
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