The change in total variable cost (which defines [...]) declines up to a certain output point and then increases as production approaches capacity limits.
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Open it The change in total variable cost (which defines marginal cost) declines up to a certain output point and then increases as production approaches capacity limits.
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Costs of fixed assets locks the firm into a certain amount of fixed cost that is used to finance the physical capital base, technology, and other capital assets. When a firm downsizes, the last expense to be cut is usually fixed cost.
<span>Total variable cost (TVC), which is the summation of all variable expenses, has a direct relationship with quantity. When quantity increases, total variable cost increases; total variable cost declines when quantity decreases. At zero production, total variable cost is always zero. Variable cost examples are payments for labor, raw materials, and supplies. As indicated above, total costs mirror total variable cost, with the difference being a constant fixed cost. The change in total variable cost (which defines marginal cost) declines up to a certain output point and then increases as production approaches capacity limits. In Exhibit 13, total variable cost increases with an increase in quantity. However, the change from 1 to 2 units is 25, calculated as (75 – 50); the change from 9 to 10 units is 350, calculated as (1,550 – 1,200).
Another approach to calculating total variable cost is to determine the variable cost per unit of output and multiply this cost figure by the number of production units. Per unit variable cost is the cost of producing each unit exclusive of any fixed cost allocation to production units. One can assign variable cost individually to units or derive an average variable cost per unit.
Whenever a firm initiates a downsizing, retrenchment, or defensive strategy, variable cost is the first to be considered for reduction given its variability with output. However, variable cost is reducible only so far because all firms have to maintain a minimum amount of labor and other variable resources to function effectively.
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