Sort costs before calculating
Fixed and variable describe behavior with output; direct and indirect describe how a cost is assigned. These are different classifications.
Average cost is $0.74 per unit; marginal cost is $0.60 per additional unit.
Separate costs that remain fixed over the relevant range from costs that vary with quantity.
Cash-flow dates and signs are part of the answer. Model values retain precision; displays round money to cents. Illustrative assumptions exclude taxes and inflation unless stated.
What the model means
Recurring costs repeat; nonrecurring costs occur once. An opportunity cost is the benefit sacrificed by using a resource. Sunk costs are past and unrecoverable; they do not change with the choice. A book cost such as depreciation need not be a cash flow, although taxes can make it relevant in a later analysis. Life-cycle analysis includes purchase, operation, maintenance, and disposal.
Build the calculation
For a linear model C=F+vq, fixed cost F is constant only over a relevant capacity range. Variable cost per unit v is the slope. Average cost falls as F is spread over more units; marginal cost is the extra cost of another unit. Only avoidable future costs belong in a differential decision.
Set up. Calculate. Explain.
Rebuild the starting scenario
Fixed cost: 10000 $; Variable cost per unit: 0.6 $/unit; Quantity: 70000 units. Calculate the total cost.
Setup hint
Separate costs that remain fixed over the relevant range from costs that vary with quantity.
Open the visual solution
- Separate costs that remain fixed over the relevant range from costs that vary with quantity.
- Variable cost = 0.6 × 70000 = $42,000.00.
- Add fixed cost $10,000.00. Sunk spending does not belong in an incremental decision.
Average cost is $0.74 per unit; marginal cost is $0.60 per additional unit.
Separate costs that remain fixed over the relevant range from costs that vary with quantity.
Cash-flow dates and signs are part of the answer. Model values retain precision; displays round money to cents. Illustrative assumptions exclude taxes and inflation unless stated.
Checks allow 0.1% numerical rounding (minimum $0.05 or 0.001 in the stated nonmonetary unit). Interpolated factors and rates are approximations; keep table precision consistent.
Transfer the idea to a new scenario
Fixed cost is $18,000, variable cost $2.40 per unit, output 12,500 units. Calculate total cost.
Setup hint
Separate costs that remain fixed over the relevant range from costs that vary with quantity.
Open the visual solution
- Separate costs that remain fixed over the relevant range from costs that vary with quantity.
- Variable cost = 2.4 × 12500 = $30,000.00.
- Add fixed cost $18,000.00. Sunk spending does not belong in an incremental decision.
Average cost is $3.84 per unit; marginal cost is $2.40 per additional unit.
Separate costs that remain fixed over the relevant range from costs that vary with quantity.
Cash-flow dates and signs are part of the answer. Model values retain precision; displays round money to cents. Illustrative assumptions exclude taxes and inflation unless stated.
Checks allow 0.1% numerical rounding (minimum $0.05 or 0.001 in the stated nonmonetary unit). Interpolated factors and rates are approximations; keep table precision consistent.
A machine was bought last year and cannot be sold. Which treatment is correct?
Can you defend your setup?
Can you place each amount on the timeline, match the interest period, calculate the equivalent quantity, and state the decision or limitation?
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