Fixed costs

Question

May I please ask how can we assume the fix cost is $300K? fixed cost per unit is $3, if we change the volume, the fixed costs= $3 * unit sold, is it correct?

thank you

Answer 1

Hi JIE,

This case is a bit misleading. It really should be contribution margin. That is, at x rate of production, what is the marginal FC per unit sold.

Of course, this changes as you change # of units.

Answer 2

Hello JIE,

You are right, the text of the case is quite confusing on that.
I think that the "fixed cost/Unit=3$" is just the incidence of the fixed costs per unit sold (total fixed costs/total volume). By definition fixed costs can not be strictly correlated with volumes. For that reason, once that you calculate the fixed costs as 3$/unit*100,000units=300k$, you can assume that they do not vary for the rest of the case.

Is that clear?

Best,
Luca

Answer 3

Hello!

Agree, misleading wording.

Important concepts here:

FIXED COSTS. they don´t vary with the output
FIXED COST/UNIT: this refers to the 3 USD in the case. These are the total fixed costs/total units, hence, the allocation of total fixed cost per each unit. The more you produce, the smaller this number will be

Hope it helps!

Cheers,

Clara

Answer 4

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