Recording-2025-03-11T12:15:32.078Z

Cost Analysis in Production

Fixed Costs

• Definition: Fixed costs are the costs that do not change with the level of production.

• Example: In this scenario, the fixed cost is $108.

Variable Costs

• Definition: Variable costs vary with the level of production and increase as more units are produced.

• Example: In this case, the variable cost at three units is also $108. This indicates that for these specific units produced, the variable cost does not exceed the fixed cost in this analysis.

Total Cost Calculation

• Total Cost: It is the sum of fixed costs and variable costs.

  • Calculation: Total Cost = Fixed Cost + Variable Cost

  • Example: Total Cost = $108 (Fixed) + $108 (Variable) = $216.

Average Total Cost

• Definition: Average total cost is computed by dividing the total cost by the number of units produced.

• Calculation: Average Total Cost = Total Cost / Quantity

  • Example: Average Total Cost = $216 / 3 = $72.

Summary of Costs

• Fixed Cost: $108

• Variable Cost: $108

• Total Cost: $216

• Average Total Cost: $72 per unit

Conclusion

• This analysis shows the relationship between fixed costs, variable costs, total cost, and average total cost at a production level of three units, helping in understanding cost structure and pricing strategy.