just what question says plz help
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why it is sometimes difficult to separate costs into variable costs and fixed? watch
- Thread Starter
- 04-03-2016 17:41
- 05-03-2016 10:01
Please elaborate on the question.
Variable costs vary with the level of output. Variable costs can include for instance, raw materials.
Consider the scenario of two bakers, both of which use the exact same supplier, hence pay the same prices for raw materials.
The price for 100 grams of flour is 10p, lets say.
For each loaf of bread, 200 grams of flour is needed.
Therefore, The variable cost per loaf of bread (unit) is 10p x 2 = 20p
Baker 1: Bakes 10 loaves of bread, therefore, he is going to have to pay the supplier 20p, ten times. This brings baker 1's total variable costs to 200p (or £2)
Baker 2: Bakes 50 loaves of bread, therefore, he is going to have to pay the supplier 20p, fifty times. This brings baker 2's total variable costs to 1000p (or £10)
As we see above, the more you manufacture, the higher your variable costs are.
For fixed costs, the concept is rather simple. These are the costs which the business MUST pay, no matter how much they produce or sell. Fixed costs can include rent.
Consider again, the scenario of the baker.
Even if the baker sold 0 loaves of bread, he's still got to pay the rent regardless of this.
Hope this helps.