Fixed Charges and Profit.

Abstract Flexible budgets and break-even charts have taught business that profit depends more on volume than on the size of the mark-on. When the variable costs remain in a constant ratio to sales or sales value of production-the sound and normal case-it is the fixed charges that mainly determine the cost/profit relationship. While they are more or less fixed in their dollar value, their ratio to sales or sales value of production, in other words, their rate, is a variable just as the profit rate. There is a remarkable interdependence between the fixed charges rate and the profit rate whenever the variable cost rate (variable/sales) is constant. This side of the cost/profit relationship has so far been somewhat neglected, for it is less conspicuous than its other aspects. It is, however, of such importance to profitable management that it deserves a special examination. Through analytical observation, an inversely symmetrical movement of the two rates can be readily detected if their changes are watched through shifting volumes. These observations lead to the following conclusion: The ratio of variable expenses to sales (or sales value of production) being constant, the profit rate is increasing with growing volume in the same ratio as the fixed charges rate is decreasing. With diminishing volume, the profit rate is decreasing in the same ratio as the fixed charges rate is increasing, if the variable rate remains constant.