Answer Posted / anjana sehgal
There are various types of fixed cost involved in business.
For example payment of Monthly Rent , Salary of permanent
employees etc. Fixed cost relating to operating cost of the
business give rise to operating leverage. The total cost
consist of variable & fixed cost. Variable cost increases
with increase in no of units produced/sold where as fixed
cost decreases with increase in no of units produced/sold
upto a certain capacity level.
Similarly the effect of such increase & decrease in sales
over profitability largely depends on the % of variable &
fixed cost in total cost.For exp. if in total cost variable
cost % is more as compared to fixed cost than in case of
increase in sales, increase in profit due to such increase
in sales will be at a greater degree due to the fact that
with each increased unit of sale , variable cost per unit
remain the same but total fixed cost has decreased in terms
of per unit paving the way for magnifying effect over
profitability due to fixed cost factor.
Similarly reverse will happen in case if in total cost
variable cost % is less as compared to fixed cost.
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