CVP Consideration in Choosing a Cost Structure
Cost structure refers to the relative proportion of fixed and variable costs in an organization. An organization often has some latitude in trading off between these two types of costs. For example, fixed investment in automated equipment can reduce variable labor costs.
The purpose of management is to reduce the cost by choosing a blend of fixed and variable costs that maximizes the ultimate objective i.e.; profit. In this section we discuss the choice of a cost structure.
Which cost structure is better-high variable costs and low fixed costs, or the opposite? No single answer to the question is possible. It depends on specific circumstances that whichever is the ideal structure. For a detailed study about cost structure and profitability consider the example below.
Abida Rehman Costing, Volume Profit CVP Relationship No Comments
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