Once sales are sufficient to cover the fixed costs incurred by the business, those fixed costs effectively become part of the company’s profit.
When determining a selling price that covers both variable and fixed costs, it is important to note that fixed costs do not increase as the number of units sold rises. As sales volume grows, the business will eventually reach the point at which the fixed costs have already been fully absorbed by the units sold.
From that moment onward, additional sales will no longer need to absorb fixed costs, since those costs have already been covered by the initial units sold. As long as the selling price remains unchanged, the portion previously allocated to fixed costs will instead contribute directly to the profit generated by the product.
At that stage, the company will begin to generate truly meaningful profits.
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