Costs and Revenues

sscors

Hello

does anyone understand why with fixed costs as they increase cost per unit decreases. Also why with variable costs as they increase:confused1 the cost per unit stays the same?:confused1:

stevef

Fixed costs are, well , fixed. They do not vary with output, so as output increases there are more units to spread the cost over. So if fixed costs are £100k, and output is 100,000 unit the fixed cost is £100,000/100,000 units = £1 per unit.

If output increases by 20,000 units say, fixed costs still stay at £100k so fixed cost per unit falls to £100,000/120,000 = £0.83.

Variable costs vary with output, if they vary at the same rate, the variable cost per unit will always be the same regardless of output, but total variable costs will increase with output.

wbauk2002

Fixed costs increase when the production cannot be sustained using current fixed cost, such as making more than x amount of units e.g. would require another floor supervisor, the cost unit could increase or decrease above a certain threshold with an increase in fixed costs, so this would help to make a management decision to decide if increasing output would have any benefit

sscors

Thanks for the replies hurray I understand