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= $3 * unit sold, is it correct?
thank you
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thank you for your quick response, Luca. in this case, I understand. However regarding the market share changes, I'd like to under stand why we make the profit equals to 100,000? I calculated the profit margin would be 1/3.
thank you
Because in this case the market share is calculated considering the volumes of units sold
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Hi JIE,
This case is a bit misleading. It really should be contribution margin. That is, at x rate of production, what is the marginal FC per unit sold.
Of course, this changes as you change # of units.
Hello JIE,
You are right, the text of the case is quite confusing on that.
I think that the "fixed cost/Unit=3$" 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
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
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