ABSTRACT
A business must know what of activity is needed to cover all expenses over and above the cost directly associated with the product, company activity. Variable costs are those that will vary in direct proportion to levels of activity and that are directly related to the product. Costs that are typically classified as variable include costs of materials, labor, shipping materials, sales commissions. The break-even point is reached when net sales equal variable costs plus fixed costs. A significant advantage of using the contribution margin approach allows a manager to develop optimum levels of sales using different pricing structures. Classifying expenses as variable and fixed can also be difficult, and some reasonable rationale is sometimes called for. The relationships between volume, cost, and price must be studied carefully and in relation to the marketplace in which the business operates.
