Fixed vs Variable cost Fixed cost any cost
Fixed vs. Variable cost �Fixed cost: any cost incurred regardless of the level of production. �Variable cost: any cost which changes in direct relationship with the production level or amount of use.
Businesses Cost FIXED VARIABLE
Fixed Cost �Any cost incurred with a fixed price �Cost is incurred no matter the level of production or use �“Overhead Cost” �Examples: ◦ Buy a car the amount to pay on license ◦ …….
DIRTI five 1. 2. 3. 4. 5. Depreciation Interest Repairs and shelter Taxes Insurance
Depreciation �Depreciation- loss of value each year due to wear, age, or obsolescence.
Interest �Cost of using money
Repairs and Shelter �Repair and shelter cost incurred to slow down wear and tear caused by weather and time are fixed cost.
Taxes �Property taxes are collected on an item each year. �Whether or not it is used
Insurance �Insurance is paid each year. �Tool to help manage risk
Variable Cost �Change in direct relation with the production level
Effect Variable Cost �Shop around for the best price �Examples: ◦ ◦ Feed Seed Fertilizer Labor
Can variable cost become fixed?
Variable Cost becomes fixed: �Once an item has been purchased it becomes a fixed cost. �The money has been spent and cannot be spent elsewhere.
Total Cost = Fixed Cost + Variable Cost
Swine Operation
Total Cost
Per Unit Cost �Per Unit cost figures are used because they reduce the values to equal units such as ◦ Tons ◦ Acres ◦ Bushels
Average Cost �Average VARIABLE cost (AVC) total variable cost divided by the quantity � AVC= TVC/Q �Average FIXED cost (AFC) total fixed cost divided by the quantity � AFC= TFC/ Q �Average TOTAL cost (ATC) total fixed cost plus the total variable cost divided by the quantity � ATC= (TFC + TVC)/Q
Cost per Unit �Used to decide if business is profitable �Example Planting corn ◦ Land 40 acres $3, 400 (FC) ◦ Fixed cost down acres planted up
Short Run Long Run � Both � All variable and fixed cost � Growing season variable cost � Long range planning for the future Short Run vs. Long Run
Short Run �Certain inputs are fixed and some are variable �Only inputs considered variable change: ◦ ◦ Livestock Medicine Feed Ingredients Number of hours worked Amount of gas used �Fixed resources cause the number of alternatives to be limited by being locked into certain uses
Which following can be changed during short-run planning? �Advertising �Depreciation �Fuel �Insurance �Interest �Salaries �Seed �Taxes (property)
Long Run �All ◦ ◦ resources are variable Amount of Land Size of business Size and amount of equipment Type of business �Example: Turkey hatchery may be converted into a feed mill �Cattle ranch converted into a dude ranch
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