Question

Distinguish between fixed and variable costs.

Explain common misapplications of costs in decision making.

Employ marginal analysis to make a rational decision (define an example)

Conduct a breakeven analysis to make a business decision. (define an example)

The response needs to be at least 200 words

Answer 1

Fixed costs incurred is cost of machinery, rent, buikdings, etc and remain static irrespective of production. Variable costs are dynamic and vary as per labor and capital utilised. Wages, utilities and materials used for production are all variables .

People commonly misapply costs for example in hotel industry when fixed costs are high, hoteliers tend to keep higher prices thinking to recover their fixed costs. However it is untrue in practically because consumption will be less if prices are higher. Hence rather prices should be moderate or lower to increase consumption and cover the fixed costs which anyways will be incurred irrespective of customers attending.

Marginal analysis is taken to evaluate profit maximization point and hence firms can decide the marginal cost and marginal revenue when equal results in profit maximization.

In breakeven analysis , total fixed and variable costs are combined and compared with sales revenues and the point at which sales revenue surpass the total costs, firm is said to achieve its breakeven point where no profit no loss is achieved . For example, total fixed cost of selling 100 units of milk is 500 dollars and total variable cost is 250 dollars, this results in total cost of 750 dollars. To achieve breakeven each total sales revenue should exceed 750 dollars.