Calculate the cost indifference point from fixed and variable costs to find the unit volume where two alternatives have equal total cost.
Cost Indifference Point Formula
The following formula is used to calculate a cost indifference point.
- Where CIP is the cost indifference point
- DFC is the fixed-cost difference, B minus A
- DVCU is the unit variable-cost difference, A minus B
To calculate the Cost Indifference Point, divide the differential fixed costs by the differential variable costs per unit.
What is a Cost Indifference Point?
Definition:
A cost indifference point is the volume where two alternatives have equal total cost under the model F + V × Q. It is not necessarily a profit break-even point. Equal unit costs give either identical total costs at every volume or no intersection; a negative intersection lies outside nonnegative production.
How to calculate a Cost Indifference Point?
Example Problem:
The following example outlines how to calculate a Cost Indifference Point.
First, determine the differential fixed costs. In this example, the differential fixed costs are calculated to be $10,000.00.
Next, determine the differential variable costs per unit. In this case, the differential variable costs per unit are equal to $500.00.
Finally, calculate the Cost Indifference Point using the formula above:
CIP = DFC / DVCU
CIP = 10,000 /500
CIP = 20 units
