Cost Behavior

Cost Behavior is the change in production cost when there is a change in level of production.  Costs related to behavior are fixed costs, variable costs, and mixed costs. Although fixed costs are incurred without activity, fixed cost per unit will decrease with increase in production. Presently Morton Corporation is sharing costs of producing high end boat anchors with the traditional fishing anchors.  With the elimination of the traditional fishing anchors an increase in high end traditional anchors can be produced, resulting with lower fixed cost per unit.  Variable cost may vary in total or proportionately with changes in activity. With all things considered variable cost per unit will remain the same with increase in the production of high end anchors.  Mixed cost is a combination cost of fixed and variable cost. Mixed cost changes in total, but not proportionate with changes in the activity level.  It appears that focusing on one product will not add more cost to the company, but instead increase sales.  The contribution margin is relevant to the decision, of production or increase production of a product. The bottom line is we want sales to increase in the production of high end anchors. If sales increase net income will increase. Presently the contribution margin is three times higher on the production of high end anchors, which indicates that there is larger sales for that product.  However if variable cost increases with the introduction of high end equipment, and fixed cost remains the same, contribution margin will decrease. Decrease in contribution margin will lower net income. On the other hand if sales increase,  contribution cost decrease due to the increase in variable cost;  the result would be an increase in net income. Sale promotion can increase sales for Mortonson Corporation, however the promotional sales must increase sale for the seller and not reduce price for the buyer.  Reduction in sales will decrease net income.  We believe that looking at all elements of cost behavior is important to maintain a high contribution margin. We believe that focusing on the high end anchor is a great strategy especially if there is a possibility to lower variable costs.

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