Let’s say a company in March produces 15,000 widgets per month. At that volume, their fixed...
Let’s say a company in March produces 15,000 widgets per month. At that volume, their fixed costs are $45,000 and total variable costs are $75,000 for a total cost of $120,000.
- What is the fixed cost per unit and the variable cost per unit?
Then in April, the same company produces 18,000 widgets.
- What is the total cost for April?
- Which of the two cost behaviors change?
- Why did those costs change?
Homework Answers
Fixed cost per unit = $45,000 / 15,000 = $3
Variable cost per unit = $75,000 / 15,000 = $5
Total cost for April = ($5 X 18,000) + $45,000 = $135,000
Variable cost changes because the Variable cost per unit remains the same and the total variable cost changes in same proportion as the units produced.
The cost change because of fixed costs. Total fixed cost remains the same but the fixed cost per unit changes with the change in the units produced.
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Let’s say a company in March produces 15,000 widgets per month.
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