Cost-volume relationship, Civil Engineering

Cost-volume relationship:

Cost-volume relationship is illustrated through a simple example dealing with the cost of operating an automobile. To perform the analysis following cost regarding owning and operating an automobile is supposed.

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Figure: Cost Volume Relationship

The cost-volume-relationship may be expressed graphically. The relation among volume (miles per year) and different type of costs (that means. fixed, variable and semi variable) is illustrated in Figure

The estimated automobile cost per annum for any assumed mileage may be determined from the graph of total cost. For instance, to drive 10,000 km in a given year a total cost of Rs. 41800 or Rs. 4.18 per km is estimated. By combining all of the fixed and variable elements of the cost, the cost of owning an automobile can be estimated as Rs.11800 per year plus Rs. 3 per km driven during the year.

The effect of volume on unit (per km) costs may be calculated through the conversion of net costs into average costs as described below:

Cost per Mile of Owning and Using an Automobile

 

Miles driven                                    5,000          10,000         15,000            20,000

Costs:                                      

Completely variable (Rs. 2Per km)   10,000                   20,000        30,000           40,000

Semi variable:                                    

Variable part (Rs.1 per km)             5,000         10,000         15,000         20,000

Fixed part                                      10,000    10,000          10,000            10,000

Fixed Costs (1500 + 300)                1,800          1,800                1,800         1,800

Total Costs                                    25,800           41,800       56,800    71,800

Cost per km                                  5.16            4.18                3.78         3.59

From the aforementioned analysis it may be seen that the variable portion of the costs raise with the increase in volume but the rate of change in variable cost remains constant. On the other hand fixed costs remains constant with changes in distances traversed but reduce on a per km basis as number of kilometers increase.

Posted Date: 1/31/2013 5:56:16 AM | Location : United States







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