Fixed and Variable Costs

In: Business and Management

Submitted By Henry
Words 506
Pages 3
Explain the difference between fixed costs, semi-fixed costs, and variable cost Anyone who runs a business knows that some cost must be paid no matter how many products are offered for sale. For example, if I own a Jeans Pants store, I must pay my property taxes whether I sell 20 or 200 pairs of pants each day. Mortgage payments must be made to the bank no matter what my activity is. These and other payments must be made regardless of sales. Expanses that must be paid no matter how many goods or services are offered for sale are called fixed costs. Other types of costs change with the number of products offered for sale. These are called variable costs. Variable costs include the wages of employees, raw materials, electric power, and the cost of maintaining inventory. Entrepreneurs need to understand the important differences between fixed and variable costs and how these differences affect a firm’s success. Fixed costs must be paid because they are beyond the control of the entrepreneurs. The only costs an entrepreneurs has immediate control over are variable costs. Semi-fixed costs are costs which only change when there is a large change in output. For example, costs associated with buying a new machine to cope with increase production. A semi-fixed cost moves upwards in a “step” fashion, staying at a certain level over a small range and then moving to the next level quickly. Total costs are made of what components? Total cost is what it cost to operate at some particular rate of output. It is the amount spent on producing a given amount of good. The components of total costs include total fixed costs and total variable costs. Fixed cost is the part of the budget that stays the same regardless of whether you produce a lot, a little bit, or even if you produce zero. Variable cost is the rest of total cost, the part…...

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