Equipment cost stays the same regardless the level of output once the plant has been designed to produce at a certain level.
Costs that vary during the time horizon of the study. Over the long-term all costs are variable.
Depends on the level of output or activity.
Proportional to the output or activity level.
Direct labor cost
A manufacturing plant that assembles television sets has variable output volume from 200 sets to 350 sets a day. The building for both manufacturing and warehousing has an area of 80, 000 square feet. It employs about 250 people. It produces all of the components that go into the assembly.
An example for variable cost in the plant is —————.
A) Building cost
B) Equipment Cost
C) Labor Cost
D) Property Taxes
Labor cost depends on the output level
Total Variable Cost = Unit Variable Cost * Quantity
TVC = VC * Q
Total Cost = Total Fixed Cost + Total Variable Cost
TC = FC + VC * Q
Total Revenue = Unit Selling Price * Quantity
TR = SP * Q
where TVC = Total variable cost
VC = Variable cost per unit
Q = Production/Selling quantity
FC = Total Fixed costs
TR = Total revenue
SP = Selling price per unit
A company produces a single, high-volume product. One year its production volume was 780,000 units, its fixed costs were $3.2 million and its variable costs were $16 per unit. What was the company’s total cost for the year?
TVC = 780,000 x 16 = $12,480,000
FC = $3.2M
TC = FC+TVC = $15,680,000
Breakeven point: The level of business activity at which the total costs to provide the products (goods), or services are equal to the revenue generated. That is:
Total costs = Total revenue
Total costs = Total fixed costs + Total variable costs
Applications of Breakeven analysis:
Determining minimum production quantity
Forecast production profit / loss