2. Treating fixed costs as variable!

Cost accountants typically unitize ('variablize') lumps of fixed costs for, say, product costing purposes (and thus create the dangerous RED line through the origin).  If the RED line is taken literally by managers, one would believe that these unit costs are "real."   For example, it can appear incorrectly that:

    Sometimes these fixed costs are traced to products (and then 'variablized').  Other times they are allocated to products (and then 'variablized') -- sometimes using a base that is variable such as direct material or direct labor! 

    In short, this practice can mislead managers into believing that fixed costs are variable.  (They may be "avoidable" but they have to be managed down.)  This faulty thinking is what lead to the "death spiral" at Bridgeton Industries.  

    The antidote to the death spiral is that, in the short run with predicted significant ongoing excess capacity, any price (a.k.a. marginal revenue) above incremental (a.k.a. marginal or variable) costs contributes to covering fixed costs and eventually to profits.  This suggests that firms should generally retain those old positive contribution products (and customers!) until they can replace them with superior new ones!

The Moral? Given a specific decision setting, attempt to determine how costs really behave, i.e., try to estimate the (true) BLUE line.