Fixed and Variable Costs

A fixed cost is a cost that remains the same regardless of changes in level of activity while a variable cost is a cost that increases in direct proportion to the increase in level of activity. For example, in producing a one-page handout for a group of students, the cost of the stencil used for typing the one page is an example of a fixed cost while the cost of duplicating paper used is a variable cost.

Such goods are sole. The $400 is the contribution per unit rather than profit per unit. If 1000 units of the article are bought and sold during an accounting period.

Contribution= 1000 x $400=$400, 000.
If the total fixed cost for the same period is $100, 000 then
Profit=contribution-fixed cost
$400, 000-$100, 000=$300,000