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Cost Behavior Over Time and Relevant Range

Consider the following:

Within this year your property taxes on your commercial building are not likely to change, and as such they are considered fixed; yet with a simple change in operating periods - to include up to a few years, these are more than likely to flux. (In one year the tax level on the property is a fixed cost, but usually it changes year over year.)

If we were to have the ability to shorten reporting periods, let's say to around a week, or longer, for around five years which would you choose, and why? How would this affect your calculations on items such as break even projections and contribution margin?

Solution Preview

Because of the variations caused by economic cycles, I think that one week is not representative of a business's true financial condition or operations. For example, the week's activity may present an unusually glum picture of the business because the business may be unusually slow during that week because the company's business is seasonal and that week is not within the selling season (e.g., a surfboard factory in January), or because a holiday falls during that week so most people are not buying the goods or services that company sells. Likewise, the week may represent a high point for the company's sales (e.g., a beachfront resort during Labor Day Weekend), so the week may present an ...

Solution Summary

This solution discusses cost behavior (i.e., fixed or variable) as viewed over time rather than within a relevant range of activity at a specific point of time. It extends that discussion to the effect of time on determining the break-even point and contribution margin.

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