When other factors are constant what is the effect on profits of an increase in fixed costs Of a decrease in variable costs?

Answer 1

From the perspective of the income statement and profits, there is no difference between bucketing costs in variable or bucketing them in fixed. The operating profit line of the income statement takes both costs into account so that an increase in one with an offsetting decrease in another will have zero impact to profits. Issue related to bucketing of certain items are normally internal discussions for a business and relate to various scorecards or metrics of interdepartmental performance. In most businesses there are separate mgrs and depts responsible for variable cost and fixed costs so the debate over where to bucket certain items is driven by whose scorecard they fall onto and ideally costs should be bucketed internally onto the scorecard of the mgr/dept with the greatest ability to influence those costs.