Understanding your Cost Curve

I recently visited a new company using high tech equipment to frame pictures that were uploaded from the web by their customers. It is an impressive operation and it got me to thinking about a useful tool for anybody in lite manufacturing. A Cost Curve Graph showing the operational cost of producing the product at various levels of production.

The basic breakeven formula of (Variable Cost Percentage * Quantity) + Fixed Costs / Quantity would produce the total cost for any particular quantity. The steps in producing the Cost Curve Graph using a spreadsheet would be as follows:

1. Set the Variable Cost Percentage and the Fixed Costs at the top of the sheet.
2. Create a column for the Production Quantity.
3. Create a second column for the calculation of the per unit costs using the breakeven formula.
4. Create a range of the various quantities from zero to the maximum quantity your operations could handle in the first column.
5. Copy the calculation formula down the page.
6. Create a graph of the two columns.

What could you do with the graph?

• You could use it as an easy reference when quoting orders.
• You change the fixed costs to equal your weekly nut and use it as an estimator of profit for that week.
• You could use it to plan your capital improvements. At some point in time, maybe around 80% of capacity, your cost per unit begins to climb as bottlenecks in the production process start to develop.