Question

The only way for a business or a non-profit enterprise to control costs is to first understand how their costs behave; Think about something you really enjoy purchasing OR that you believe you would REALLY enjoy purchasing (let's keep it clean, please!). Think about what it takes to produce this product (can be a good, like European butter - SO delicious - or a service, like a open heart surgery). Identify the fixed costs of production (SPECIFICALLY identify 3-5 of them) and the variable costs of production (SPECIFICALLY identify 3-5 of them) and defend your separation of fixed vs. variable costs.

Answer 1

Variable cost is a firm's cost which is linked with the amount of the product it produces. A firm's variable cost rises & falls with its volume of production. Whilst production volume rises, the variable costs will augment and vice versa. Variable costs are computed by multiplying the amount of output by the variable cost for each unit of output.

Fixed cost is the another cost incurred by corporations. Unlike the variable expenses, a firm's fixed expenditure doesn’t vary with the volume of manufacturing. It stays the same even if no products are produced, and thus, can’t be avoided.

The more fixed costs a firm has, the more revenue a firm requires to break even, which implies it needs to work harder to manufacture & sell its goods. That is because these expenses occur regularly & seldom change.

The common instances of fixed expenses include rent payments, insurance, and interest payments.

Whilst variable costs tend to stay flat, the effect of fixed costs on a firm's bottom line can change based upon the number of goods it produces. So, when production rises, the fixed cost falls. The price of a higher amount of products can be spread over the same sum of a fixed cost. A firm can, thus, obtain economies of scale.