As a result, your per unit variable cost would be $0.208. This is quite a remarkable spread.ĭespite the wild spread in pricing, if your business needed about 150 of these diodes in your production process, you would study the above table and determine that the best quantity for you to order would be priced at $20.80 per hundred. The bottom line here is that they range from $0.44 down to $0.092 each, depending on the quantity purchased. ![]() Notice that they are $0.44 each, or $3.00 for ten units, or $20.80 for 100 units, or $92.00 per thousand. This is a pricing table for surface mount Zener Diodes. However, care must also be exercised to limit one's analysis to a "relevant range" of activity.īelow is an excerpt from an online catalog (Digi-Key Corporation). The accountant is not blind to these issues and must take them into consideration in any business evaluation. In addition, enhanced buying power results (e.g., quantity discounts) as volume goes up, and this can reduce the per unit variable cost. ![]() For starters, fixed costs can be spread over larger production runs, and this causes a decrease in the per unit fixed cost. This means that certain efficiencies are achieved as production levels rise. Economies of SaleĮconomists speak of the concept of economies of scale. No matter the specific example, a manager must understand their cost structure. These activities suggest attempts to structure businesses with a definitive margin (revenues minus variable costs) that scales up and down with changes in the level of business activity. And, we are now seeing more outsourcing, elimination of health insurance, conversion of pension plans, and so forth. However, those components have become more affordable. Some of this was the result of increased investment in robotics and technology. For a long time, the trend for many businesses was toward increased fixed costs. The effect is to transform the organization's fixed costs to variable, and better insulate the bottom line from fluctuations brought about by the related ability to cover or not cover the fixed costs of operations.Įvery business is unique, and a savvy business person will be careful to understand their cost structure. Rather than having a fixed staff that is either idle or overloaded at any point in time, they pay an independent support company a per-call fee. For example, a computer company might outsource its tech support. Other businesses have attempted to avoid fixed costs so that they can maintain a more stable stream of income relative to sales. Basically, there is not much cost difference in flying a plane empty or full! Software companies have a big investment in product development, but very little cost in reproducing multiple electronic copies of the finished product. During boom years, these same companies have been extremely profitable, because costs do not rise (much) with increases in volume. As you are aware, airlines have struggled during lean years because they are unable to cover fixed costs. Airlines have historically been burdened with high fixed costs related to gates, maintenance, contractual labor agreements, computer reservation systems, aircraft, and the like. The nature of a specific business will have a lot to do with defining its inherent fixed cost structure. Business Implications of the Fixed Cost Structure
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