Question

Why is it important to distinguish between fixed and variable costs?

Answer 1

It is important to distinguish between fixed and variable costs because:

a) Fixed cost remains same irrespective of the no. of units produce or level of production, whereas variable cost per unit changes with change in no. of units produce or level of production.

b) Once a company reaches its break even point i.e. recover its total fixed cost by sale of units, it can charge less price now in order to increase further sale, but that price should not be less than variable cost. So in that case also company should know its fixed cost and variable cost.