Cost

Variable cost Fixed cost

 Fixed cost
Fixed cost does not changes with respect to production .suppose 1M pieces are made in a
factory and due to some reason the production lowers ,it has zero effect on the FIXED
PRICE ,thus the fixed price remains constant e.g land ,buildings ,rent ,lease etc but in each
case time differs .the fixed prices includes

 Buildings
25 years limitation –Depriciated
Land
Appreciated –utilization differs
These are all at fixed cost ,the cost doest not changes with respect to production
Neither if the production increases nor if it lowers
 Machines
Used 5 years /new 10 years –Depriciated
Machine cost neither changes ,with respect to use of it . neither if is used efficiently
and regularly nor if it seldom used
 Loan
Depend on time period
Loan taken from the bank ,one pays a cost on the loan .Principal amount the exact
fixed amount of loan taken .Intrest cost the amount paid to the bank other than the
fixed cost that is set with respect to the time period one takes the loan .
 Bonus
This cost is irrespect to the production .It has no concern with the production .
 Property tax
This is fixed by the government and is fixed no matter what production scale is .

*Fixed cost remains same in case if production increases /unit cost decreases

 Variable cost
A cost that changes with the level (quality )of output . cost directly proportional to the
production is variable . variable cost include raw materials, packaging, and labor directly
involved a company's manufacturing process

Variable costs is the change in the opportunity cost that arises when the quantity produced is
incremented by one unit, that is, it is the cost of producing one more unit of a good. marginal
cost at each level of production includes the cost of any additional inputs required to produce
the next unit
  Raw material
If raw material used for production is cheap the cost automatically lowers there for
the cost becomes variable depending on the cheapness of material used but the quality
is effected at the end .
 Labour cost
Labour cost is subdivided into salaries and wages .salary is given with time and with
benefit as bonus depending on the output .wages is given per day not depending on
the output .
 Utility cost
It includes gas , water, electricity plus steam used , in other countries they also
include the severage cost .it varies per unit if the production increases or viseversa

Economics of scale
Economies of scale is a term that refers to the reduction of per-unit costs through an increase in
production volume
Let's assume that it costs Company X $1,000,000 to produce 1 million piece
per year (or $1.00 per peice). This $1,000,000 cost includes $500,000 ($0.50 per
piece ) of administrative, insurance, and marketing expenses, which are generally fixed,
as well as $500,000 ($0.50 per piece ) of variable cost.

Now, let's suppose that company X decides to produce 2,000,000 piece next year. In
this case, the variable costs will double, because the number of items produced has
doubled. Thus, variable costs will rise from $500,000 to $1,000,000 (2 million x $0.50
each = $1,000,000). However, the firm's fixed cost will not change regardless of the
number of peice manufactured. As such, fixed costs will remain at $500,000.

In this example, the total cost to produce 2 million piece will rise to $1,500,000, and
therefore the cost per piece will fall to $0.75 ($1.5 million/2 million peice). Because the
fixed costs have been spread over a larger number of units, the cost per unit will
decline from $1.00 to $0.75.

Obviously, if company X decided to increase its production capacity to 3 million piece ,

then its per-unit costs would fall even further. Variable costs would increase to
$1,500,000 (3 million peice x $0.50 each = $1,500,000). But again, fixed costs would
be unchanged at $500,000. Therefore, the total cost to make 3 million piece would rise
to $2,000,000, but the per-unit cost would drop to just $0.66.

As production increases, total costs will also rise. However, because company X can
spread its fixed costs over more units it is able to reduce the costs to produce each
piece . However, the first 1 million increase dropped the price by $0.25 each (from
$1.00 to $0.75), but the next increase only resulted in a $0.09 decline (from $0.75 to
$0.66). As such, as volume levels rise, the cost on each new unit is slightly smaller than
the one before. In any case, the firm's costs can never fall below $0.50 per unit, unless
the company can also find a way to decrease its variable production costs.