• Fixed Costs
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Economies of scale
1
In microeconomics, economies of scale
are the cost advantages that enterprises
obtain due to size, with cost per unit of
output generally decreasing with
increasing scale as fixed costs are spread
out over more units of output. Often
operational efficiency is also greater with
increasing scale, leading to lower variable
cost as well.
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Small business Problems faced by small businesses
1
To break even, the business must be able
to reach a level of sales where the
contribution margin equals fixed costs
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Cost accounting Origins
1
Managers must understand fixed costs in order to
make decisions about products and pricing.
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Cost accounting Origins
If the fixed costs were, say, $1000 per
month for rent, insurance and owner's
salary, the company could therefore sell 5
coaches per month for a total of $3000
(priced at $600 each), or 10 coaches for a
total of $4500 (priced at $450 each), and
make a profit of $500 in both cases.
1
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Cost accounting Classification of costs
1
By Behavior: fixed, variable, semi-variable.
Costs are classified according to their
behavior in relation to change in relation to
production volume within given period of
time. Fixed Costs remain fixed irrespective
of changes in the production volume in
given period of time. Variable costs
change according to volume of production.
Semi-variable Costs costs are partly fixed
and partly variable.
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Cost accounting Classification of costs
1
Capacity Cost: These costs are normally
fixed costs. The cost incurred by a
company for providing production,
administration and selling and distribution
capabilities in order to perform various
functions.
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Cost accounting Standard cost accounting
1
It also essentially enabled managers to
ignore the fixed costs, and look at the
results of each period in relation to the
"standard cost" for any given product.
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Cost accounting Standard cost accounting
1
For example: if the railway coach company
normally produced 40 coaches per month,
and the fixed costs were still $1000/month,
then each coach could be said to incur an
Operating Cost/overhead of $25 =($1000 /
40). Adding this to the variable costs of
$300 per coach produced a full cost of
$325 per coach.
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Cost accounting Standard cost accounting
1
This method tended to slightly distort the
resulting unit cost, but in mass-production
industries that made one product line, and
where the fixed costs were relatively low,
the distortion was very minor.
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Cost accounting Activity-based costing
1
As it is a tool for a more accurate way of
allocating fixed costs into product, these
fixed costs do not vary according to each
month's production volume. For example,
an elimination of one product would not
eliminate the overhead or even direct labor
cost assigned to it. ABC better identifies
product costing in the long run, but may
not be too helpful in day-to-day decisionmaking.
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Cost accounting Marginal costing
The margin contribution can also be
expressed as a percentage. The
contribution margin ratio, which is
sometimes called the profit-volume ratio,
indicates the percentage of each sales
dollar available to cover fixed costs and to
provide operating revenue. For the
company Fusion, Inc. the contribution
margin ratio is 40%, which is computed as
follows:
1
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Automotive engineering - Product Engineering
Cost: The cost of a vehicle program is
typically split into the effect on the variable
cost of the vehicle, and the up-front tooling
and fixed costs associated with developing
the vehicle. There are also costs
associated with warranty reductions, and
marketing.
1
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Forensic psychology - Trial Consultant
1
They are not only social scientists; they
may be entrepreneurs as well, marketing
their business and keeping fixed costs
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Internet access - Pricing and spending
With increased consumer demand for
streaming content such as video on demand
and peer-to-peer file sharing, demand for
bandwidth has increased rapidly and for
some ISPs the flat rate pricing model may
become unsustainable. However, with fixed
costs estimated to represent 80–90% of the
cost of providing broadband service, the
marginal cost to carry additional traffic is low.
Most ISPs do not disclose their costs, but the
cost to transmit a gigabyte of data in 2011
was estimated to be about $0.03.
1
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Patent - Rationale
1
In many industries (especially those with
high fixed costs and either low marginal
costs or low reverse engineering costs —
computer processors, and
pharmaceuticals for example), once an
invention exists, the cost of
commercialization (testing, tooling up a
factory, developing a market, etc.) is far
more than the initial conception cost
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Mergers and acquisitions - Improving financial performance
1
Economy of scale: This refers to the fact
that the combined company can often
reduce its fixed costs by removing
duplicate departments or operations,
lowering the costs of the company relative
to the same revenue stream, thus
increasing profit margins.
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Mergers and acquisitions - The Great Merger Movement: 1895–1905
1
Due to high fixed costs, when demand fell,
these newly merged companies had an
incentive to maintain output and reduce
prices
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Mergers and acquisitions - Short-run factors
For producers of homogeneous goods,
when demand falls, these producers have
more of an incentive to maintain output
and cut prices, in order to spread out the
high fixed costs these producers faced (i.e
1
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Mergers and acquisitions - Short-run factors
1
However, also being in a high fixed costs
industry, these costs can be spread out
through greater production (i.e
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Monopoly - Sources of monopoly power
Capital requirements: Production
processes that require large investments
of capital, or large research and
development costs or substantial sunk
costs limit the number of companies in an
industry. Large fixed costs also make it
difficult for a small company to enter an
industry and expand.
1
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Monopoly - Monopoly versus competitive markets
1
However, the one monopoly profit theorem
is not true if customers in the monopoly
good are stranded or poorly informed, or if
the tied good has high fixed costs.
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Monopoly - Natural monopoly
1
A natural monopoly is a company that
experiences increasing returns to scale
over the relevant range of output and
relatively high fixed costs
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Product lifecycle - Stages
Highest Product
prices:Lower input and
sales absorbing fixed costs.
1
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Carbon footprint - Voluntary Market Mechanisms
1
Industrial Gas projects receive criticism
because such projects only apply to large
industrial plants that already have high
fixed costs
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Load management - Advantages and Operating Principles
A higher load factor is advantageous
because a power plant may be less
efficient at low load factors, a high load
factor means fixed costs are spread over
more kWh of output (resulting in a lower
price per unit of electricity), and a higher
load factor means greater total output
1
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Base load power plant - Economics
1
On the other hand, peak load generators,
such as natural gas, have low fixed costs,
low plant load factor and high marginal
costs.
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Economics of new nuclear power plants - Capital costs
1
The usual rule of thumb for nuclear power
is that about two thirds of the generation
cost is accounted for by fixed costs, the
main ones being the cost of paying
interest on the loans and repaying the
capital... The Doomsday Machine, Cohen
and McKillop (Palgrave 2012) page 89
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Economics of new nuclear power plants - Capital costs
1
Areva, the French nuclear plant operator,
for example, offers that 70% of the cost of
a kWh of nuclear electricity is accounted
for by the fixed costs from the construction
process
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Subway (rail) - Costs, benefits, and impacts
1
Rapid transit systems
have high fixed costs
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Biomass briquettes - Criticism
The fixed costs with the production of
biomass briquettes are high due to the
new undeveloped technologies that
revolve around the extraction, production
and storage of the biomass
1
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Business efficiency
1
The 'efficiency ratio', a ratio that typically
applies to banks, in simple terms is
defined as expenses as a percentage of
revenue ('expenses / revenue'), with a few
variations. A lower percentage is better
since that means expenses are low and
earnings are high. It relates to operating
leverage, which measures the ratio
between fixed costs and variable costs.
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Public good - Introducing an exclusion mechanism (club goods)
1
Examples of such natural club goods
include Natural monopoly|natural
monopolies with very high fixed costs,
private golf courses, cinemas, cable
television and social clubs
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Education in New Zealand - Primary and secondary
1
Smaller schools receive additional funding
due to the added fixed costs of running
them compared to larger schools, and
schools also receive funding based on the
school's Socio-Economic Decile|socioeconomic decile rating, with low-decile
schools (i.e
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Merger - Improving financial performance
1
*Economy of scale: This refers to the fact
that the combined company can often
reduce its fixed costs by removing
duplicate departments or operations,
lowering the costs of the company relative
to the same revenue stream, thus
increasing profit margins.
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Merger - The Great Merger Movement: 1895–1905
1
Due to high fixed costs, when demand fell,
these newly merged companies had an
incentive to maintain output and reduce
prices
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Decoupling - Utility regulation
1
However, most current rate designs place
the focus on commodity sales instead,
tying a distribution company's recovery of
fixed costs directly to its commodity sales.
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Environmental sociology - Treadmill of production
1
Schnaiberg's political capitalism, otherwise
known as the 'Treadmill of production,' is a
model of conflict as well as cooperation
between three abstracted groups: the
state, capital (exclusively monopoly capital
with its larger fixed costs and thus larger
pressures for ongoing expansion of profits
to justify more fixed costs), and
(organized) labor
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Hospitality industry - Competition and usage rate
Just as a factory owner would wish a
productive asset to be in use as much as
possible (as opposed to having to pay
fixed costs while the factory isn't
producing), so do restaurants, hotels, and
theme parks seek to maximize the number
of customers they process in all sectors
1
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Economy of scale
1
In microeconomics, 'economies of scale'
are the cost advantages that enterprises
obtain due to size, throughput, or scale of
operation, with cost per unit of output
generally decreasing with increasing scale
as fixed costs are spread out over more
units of output. Often operational
efficiency is also greater with increasing
scale, leading to lower variable cost as
well.
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Dental tourism - Pricing and quality
Reasons for lower prices are many:
dentists outside the developed world are
able to take advantage of much lower
fixed costs, lower labor costs, less
government intervention, lower education
fees and expenses, and lower insurance
costs
1
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Lancia Beta - Origins
1
These were key factors that influenced the
decision to utilize an existing power plant: the
Fiat twin overhead cam straight four engine
with its alloy head and cast iron block.Lancia
Beta - A Collector's Guide At the Beta’s
launch late in 1972 Fiat chief Gianni Agnelli
told journalists that Lancia’s output would be
about 40,000 units in 1972 at a time when a
volume of 100,000 was needed to cover the
fixed costs involved in developing and
building the cars
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Financial management for IT services - IT accounting
1
Fixed costs: Any expenses established for
long periods of time like annual
maintenance contracts or a lease
contracts. These expenses do not vary in
the short-term.
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Software-defined radio - Military
Still, software defined radio's inherent
flexibility can yield substantial benefits in
the longer run, once the fixed costs of
implementing it have gone down enough
to overtake the cost of iterated redesign of
purpose built systems
1
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Electric power transmission - Bulk power transmission
The unvarying (or slowly varying over
many hours) portion of the electric
demand is known as the base load power
plant|base load and is generally served by
large facilities (which are more efficient
due to economies of scale) with fixed
costs for fuel and operation
1
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Water supply - Costs and financing
1
The cost of supplying water consists to a
very large extent of fixed costs (capital
costs and personnel costs) and only to a
small extent of variable costs that depend
on the amount of water consumed (mainly
energy and chemicals)
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Microeconomics - Traditional marginalism
1
Note that fixed costs are fixed only in their
aggregate amounts, and vary with output
in their amount per unit, while direct costs
vary in their aggregate amount as output
varies, as well as—ordinarily, at least—in
their amount per unit.
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Ink jet material deposition
1
'Ink jet material deposition' is an emerging
manufacturing technique in which Inkjet
printer|ink jet technology is used to deposit
materials on Substrate
(printing)|substrates. The technique aims
to eliminate fixed costs of production and
reduce the amount of materials used.
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Copenhagen Suborbitals - Support group
1
By paying a fixed monthly amount, the
members of Copenhagen Suborbitals
Support now covers all of the fixed costs
for the project in addition to donating
various forms of hardware.
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Natural monopoly - Explanation
Natural monopolies arise where the
largest supplier in an industry, often the
first supplier in a market, has an
overwhelming cost advantage over other
actual or potential competitors; this tends
to be the case in industries where fixed
costs predominate, creating economies of
scale that are large in relation to the size
of the market, as is the case in water and
electricity services
1
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Natural monopoly - Explanation
1
A firm with high fixed costs requires a
large number of customers in order to
have a meaningful return on investment
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Asteroid mining - Financial feasibility
The payback period and the high risk
involved make asteroid mining a less
competitive venture compared to terrestrial
projects. Launching costs may be the most
significant, which can only lower over time
through to increased competition and
technological improvements. Asteroid
mining will become more viable when fixed
costs lower due to development in
infrastructure.
1
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Marginal revenue productivity theory of wages
1
MRP also relates to the optimal wage rate,
as Neoclassical theory states that wages
are equal to the marginal revenue product
divided by the ratio between variable and
fixed costs, in competitive markets
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CVP analysis - Break down
1
One can decompose total costs as
fixed costs plus variable costs:
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CVP analysis - Break down
1
Following a matching principle of matching
a portion of sales against variable costs,
one can decompose sales as Contribution
margin|contribution plus variable costs,
where 'contribution' is what's left after
deducting variable costs. One can think of
contribution as the marginal contribution of
a unit to the profit, or contribution towards
offsetting fixed costs.
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CVP analysis - Break down
1
Note that the profit and loss for any given
number of unit sales is the same, and in
particular the break-even point is the
same, whether one computes by sales =
total costs or as contribution = fixed costs
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CVP analysis - Limitations
1
CVP is a 'short run', 'marginal' analysis: it
assumes that unit variable costs and unit
revenues are constant, which is
appropriate for small deviations from
current production and sales, and
assumes a neat division between fixed
costs and variable costs, though in the
long run all costs are variable
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Fixed cost
1
In economics, 'fixed costs', 'indirect costs'
or 'overheads' are business expenses that
are not dependent on the level of goods or
services produced by the business. They
tend to be time-related, such as salaries or
rents being paid per month, and are often
referred to as overhead costs. This is in
contrast to variable costs, which are
volume-related (and are paid per quantity
produced).
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Fixed cost
1
In management accounting, fixed costs
are defined as expenses that do not
change as a function of the activity of a
business, within the relevant period. For
example, a retailer must pay rent and
utility bills irrespective of sales.
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Fixed cost
1
In a survey of nearly 200 senior marketing
managers, 60 percent responded that they
found the variable and fixed costs metric
very useful.Farris, Paul W.; Neil T
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Fixed cost - Areas of confusion
Fixed costs are not permanently fixed;
they will change over time, but are fixed in
relation to the quantity of production for
the relevant period. For example, a
company may have unexpected and
unpredictable expenses unrelated to
production; and warehouse costs and the
like are fixed only over the time period of
the lease.
1
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Fixed cost - Areas of confusion
1
Discretionary fixed costs can be
expensive.
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Fixed cost - Areas of confusion
In business planning and management
accounting, usage of the terms fixed costs,
variable costs and others will often differ
from usage in economics, and may
depend on the context. Some cost
accounting practices such as activitybased costing will allocate fixed costs to
business activities for profitability
measures. This can simplify decisionmaking, but can be confusing and
1
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Fixed cost - Areas of confusion
1
The implicit assumption required to make
the equivalence between the accounting
and economics terminology is that the
accounting period is equal to the period in
which fixed costs do not vary in relation to
production
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Public capital - Economic growth
1
Both fixed costs and transport costs lower
with expanded infrastructure in localities
and the resulting cluster of industries
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Shift work - Management practices
1
cost per employee, is often 25% to 40%
lower on 2nd and 3rd shifts due to fixed
costs which are paid by the first shift.Alan
Blinder and William Baumol 1993,
Economics: Principles and Policy,
Harcourt Brace Jovanovich, San Diego,
p.687.
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Telecommunications Act of 1996 - Policy considerations of new environment
Generally speaking, the number of
broadband networks is limited by cost
constraint—huge, sunk, up-front, fixed
costs—which do not apply to applications
providers. In this new environment, there
will be three broad categories of
competition:
1
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Budget management - Classification of costs
# By Behavior: fixed, variable, semivariable. Costs are classified according to
their behavior in relation to change in
relation to production volume within given
period of time. Fixed Costs remain fixed
irrespective of changes in the production
volume in given period of time. Variable
costs change according to volume of
production. Semi-variable Costs costs are
partly fixed and partly variable.
1
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Budget management - Classification of costs
1
*Capacity Cost: These costs are normally
fixed costs. The cost incurred by a
company for providing production,
administration and selling and distribution
capabilities in order to perform various
functions.
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Budget management - Standard Cost Accounting: Setting Standards and Analyzing
Variances
:For example: if the railway coach
company normally produced 40 coaches
per month, and the fixed costs were still
$1000/month, then each coach could be
said to incur an Operating Cost/overhead
of $25 =($1000 / 40). Adding this to the
variable costs of $300 per coach produced
a full cost of $325 per coach.
1
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Value driven maintenance - Asset Utilization
With higher technical availability, it is
possible to produce and sell more
products with the same invested capital,
generating more income while the fixed
costs remain the same
1
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Charles Babbage - Babbage principle
He also pointed out that training or
apprenticeship can be taken as fixed
costs; but that returns to scale are
available by his approach of
standardisation of tasks, therefore again
favouring the factory system
1
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Eli Whitney - Interchangeable parts
When the government complained that
Whitney's price per musket compared
unfavorably with those produced in
government armories, Whitney was able to
calculate an actual price per musket by
including fixed costs such as insurance and
machinery, which the government had not
included. He thus made early contributions to
both the concept of cost accounting, and the
concept of the efficiency
(economics)|efficiency of private industry.
1
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Overhead (business)
The term overhead is usually used when
grouping expenses that are necessary to the
continued functioning of the business but
cannot be immediately associated with the
products or services being offered (i.e.,do not
directly generate profit
(accounting)|profits).[http://www.pmhut.com/p
mo-and-project-management-dictionary PMO
and Project Management Dictionary] Closely
related accountancy|accounting concepts are
fixed costs and variable costs as well as
indirect costs and direct costs.
1
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Profit maximization - Basic definitions
1
Fixed costs, which occur only in the short
run, are incurred by the business at any
level of output, including zero output
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Abuse of dominance - Sources of monopoly power
::Capital requirements: Production
processes that require large investments
of capital, or large research and
development costs or substantial sunk
costs limit the number of companies in an
industry.Samuelson Marks (2003), p. 365.
Large fixed costs also make it difficult for a
small company to enter an industry and
expand.
1
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Abuse of dominance - Natural monopoly
A natural monopoly is a company that
experiences Economies of
Scale|increasing returns to scale over the
relevant range of output and relatively high
fixed costs.Binger and Hoffman (1998), p
1
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Marginal cost - Cost functions and relationship to average cost
1
In the simplest case, the total cost function
and its derivative are expressed as
follows, where Q represents the
production quantity, VC represents
variable costs, FC represents fixed costs
and TC represents total costs.
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Marginal cost - Cost functions and relationship to average cost
Since (by definition) fixed costs do not
vary with production quantity, it drops out
of the equation when it is differentiated.
The important conclusion is that marginal
cost is not related to fixed costs. This can
be compared with average total cost or
ATC, which is the total cost divided by the
number of units produced and does
include fixed costs.
1
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Marginal cost - Economies of scale
1
For this generic case, minimum average
cost occurs at the point where average
cost and marginal cost are equal (when
plotted, the marginal cost curve intersects
the average cost curve from below); this
point will not be at the minimum for
marginal cost if fixed costs are greater
than 0.
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Marginal cost - Relationship to fixed costs
1
Since fixed costs do not vary with (depend on)
changes in quantity, MC is ∆VC∕∆Q
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Global strategy
However, fixed costs
(capital (economics)|capital
equipment) are substantial
1
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Perfect competition - The shutdown point
The firm still retains its capital assets;
however, the firm cannot leave the
industry or avoid its fixed costs in the short
run
1
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Indirect costs - Indirect vs direct costs
Indirect costs do not vary substantially
within certain production volumes or other
indicators of activity, and so they may
sometimes be considered to be fixed
costs.http://www.accountingtools.com/que
stions-and-answers/what-are-indirectcosts.html
1
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Remote laboratory - Benefits
1
* 'Economies of scale', as sharing labs
allows sharing of large fixed costs of
traditional buildings
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Public goods - Introducing an exclusion mechanism (club goods)
1
Examples of such natural club goods
include Natural monopoly|natural
monopolies with very high fixed costs,
private golf courses, cinemas, cable
television and social clubs
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Parasite single - Dynamics
1
The additional expenses for the parents
due to the additional household member
are usually small, as the fixed costs such
as rent must be paid regardless, and the
additional cost for food and other
consumables is sometimes negligible
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Long run - Short run
Such fixed costs raise the associated
average cost#Short-run average
cost|short-run average cost of an output
long-run average cost if the amount of the
fixed factor is better suited for a different
output level
1
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Diminishing returns - Returns and costs
1
Although there are other costs, assume
they do not vary with the amount of output
and are therefore fixed costs
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Monopolistic competition - Many firms
How many firms will an MC market
structure support at market equilibrium?
The answer depends on factors such as
fixed costs, economies of scale and the
degree of product differentiation. For
example, the higher the fixed costs, the
fewer firms the market will support. Also
the greater the degree of product
differentiation—the more the firm can
separate itself from the pack—the fewer
firms there will be at market equilibrium.
1
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Kinked demand - Formulation
1
They base this on a notion of full cost marginal cost of each unit plus a percent
of overhead costs or fixed costs with an
additional percent added for profit
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Marginal product of labour - Marginal costs
Fixed costs are costs that relate to the
fixed input, Capital (economics)|capital, or
rK, where r is the rate of return and K is
the quantity of capital
1
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Profit model - Model extensions
The basic profit model is sales minus
costs. Sales are made up of quantity sold
multiplied by their price. Costs are usually
divided between Fixed costs and variable
costs.
1
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Profit model - Production costs
1
* Fm = manufacturing fixed
costs;
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Operating margin
1
It is a measurement of what proportion of
a company's revenue is left over, before
taxes and other indirect costs (such as
rent, bonus, interest, etc.), after paying for
variable costs of production as wages, raw
materials, etc. A good operating margin is
needed for a company to be able to pay
for its fixed costs, such as interest on debt.
A higher operating margin means that the
company has less financial risk.
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Porter five forces analysis - Bargaining power of customers (buyers)
* Bargaining leverage,
particularly in industries
with high fixed costs
1
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Propellant Depot
With the LEO depot, the size of the
launch vehicle can be reduced and the
flight rate increased, which may reduce
the total launch costs since the fixed costs
are spread over more flights and fixed
costs are usually lower with smaller launch
vehicles
1
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Propellant Depot - Heavy Lift versus Depot Centric Architectures
1
Depot advocates claim this increase in
mission mass would be offset by a
decrease in the cost per launch and the
elimination of the fixed costs of the heavy
lift launch vehicle when not required in
given year. Further, long life components
including insulation and power and
cryocoolers could be placed on the depot
and not expended, further reducing the
mass per mission and hence costs.
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Price discrimination - Theoretical basis
However, product heterogeneity,
Frictionless market|market frictions or high
fixed costs (which make marginal-cost
pricing unsustainable in the long run) can
allow for some degree of differential
pricing to different consumers, even in fully
competitive retail or industrial markets.
1
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Price discrimination - Explanation
Strictly, a consumer surplus need not
exist, for example where some below-cost
selling is beneficial due to fixed costs or
economies of scale
1
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Virtual CFO - The Need
1
Lechter There have been studies claiming
that among the top issues faced by Indian
startup CEOs are hiring financial and legal
experts, according to a virtual
CFO.[http://articles.economictimes.indiati
mes.com/2013-1219/news/45377498_1_smes-clientsstartups The Economic Times] Startups
like to keep fixed costs low and having
outsourced service provider provides them
the flexibility of choosing services as and
when required
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Decoupling (utility regulation)
1
Ideally, utilities should be rewarded based
on how well they meet their customers'
energy service needs. However, most
current rate designs place the focus on
commodity sales instead, tying a
distribution company's recovery of fixed
costs directly to its commodity sales.
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Cost-plus pricing
Cost-plus pricing is often used on
government contracts (cost-plus contracts)
and has been criticized as promoting
wasteful expenditures in the form of direct
costs, indirect costs, and fixed costs
whether related to the production and sale
of the product or service or not. These
costs are converted to per-unit costs for
the product; then a predetermined
percentage of these costs is added to
provide a profit margin.
1
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Cost-plus pricing - Disadvantages
* Uses “normal” or
“standard” output level
to allocate fixed costs
1
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Everyday low price - Concept
1
EDLP strategies generally result in lower
fixed costs, since they require less
advertising for promotional prices, less
labor to execute price changes, and
simpler pricing and inventory management
software|inventory management systems
with lower overhead
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Economic cost - Components of Economic Costs
**Fixed cost (TFC) fixed costs are the
costs of the fixed assets those that do not
vary with production.
1
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Economic cost - Components of Economic Costs
1
**Average fixed cost (AFC) = fixed costs
divided by output. AFC = TFC/q. The
average fixed cost function continuously
declines as production increases.
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Economic cost - Components of Economic Costs
1
**Average variable cost (AVC) = variable
costs divided by output. AVC =T VC/q. The
average variable cost curve is typically Ushaped. It lies below the average cost
curve and generally has the same shape the vertical distance between the average
cost curve and average variable cost
curve equals average fixed costs. The
curve normally starts to the right of the y
axis because with zero production
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Minimum efficient scale - Relationship to average cost and marginal cost
But if the firm produces more units, the
average cost incurred per unit will be lower
as the fixed costs are spread over a larger
number of units; the marginal cost is below
the average cost, pulling the latter down
1
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Porter's generic strategies - Cost Leadership Strategy
1
These approaches mean fixed costs are
spread over a larger number of units of the
product or service, resulting in a lower unit
cost, i.e
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International joint venture - Reasons for forming a joint venture
1
*'Economies of Scale' – If an industry has
high fixed costs, a JV with a larger
company can provide the economies of
scale necessary to compete globally and
can be an effective way by which two
companies can pool resources and
achieve critical mass.
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Markov perfect equilibrium - Industrial organization extended example
1
As an example of the use of this equilibrium
concept we consider the competition between
firms which had invested heavily into fixed
costs and are dominant producers in an
industry, forming an oligopoly. The players
are taken to be committed to levels of
production capacity in the short run, and the
strategies describe their decisions in setting
prices. The firms' objectives are modeled as
maximizing the present discounted value of
profits.Tirole (1988), p. 254
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Level playing field
Some government regulations are
intended to provide such fairness, since all
participants must abide by the same rules.
However, they can have the opposite
effect, for example if larger firms find it
easier to pay for fixed costs of regulation.
1
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Model T - Price and Production
1
The assembly line system allowed Ford to
sell his cars at a price lower than his
competitors due to the efficiency of the the
system. As he continued to fine tune the
system, he was able to keep reducing his
costs. As his volume increased, he was
able to also lower the prices due to fixed
costs being spread over a larger number
of vehicles. Other factors affected the
price such a material costs and design
changes.
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Costs (English law) - Fixed costs and fees
There are also fixed costs for Traffic
collision|road traffic accident (RTA) claims
that settle before they are issued;CPR 45,
Section II-III in certain cases brought by
HM Revenue and Customs|HM Revenue
Customs.CPR 45, Section V
1
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BahnCard - Motivation
1
The card allowed a two-dimensional pricing
schedule, which consists of card price (a
fixed cost), and ticket price (a variable cost).
Once a passenger has bought a card, its
price becomes a sunk cost and this makes
the train more like the automobile, which is
also characterised by high fixed costs. The
decision whether to take a car or train for a
particular journey depends mostly on the
Marginal cost|marginal price per kilometer,
not on the total cost.
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Cost management - Origins
1
Some costs tend to remain the same even
during busy periods, unlike variable costs,
which rise and fall with volume of work. Over
time, these fixed costs have become more
important to managers. Examples of fixed
costs include the depreciation of plant and
equipment, and the cost of departments such
as maintenance, tooling, production control,
purchasing, quality control, storage and
handling, plant supervision and
engineering.Performance management,
Paper f5. Kapalan publishing UK. Pg 3
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Total cost
In economics, and cost accounting, 'total
cost' ('TC') describes the total economic cost
of production and is made up of variable
costs, which vary according to the quantity of
a good produced and include inputs such as
labor and raw materials, plus fixed costs,
which are independent of the quantity of a
good produced and include inputs (Capital
(economics)|capital) that cannot be varied in
the short term, such as buildings and
machinery.
1
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Total cost
1
If one assumes that the unit variable cost
is constant, as in cost-volume-profit
analysis developed and used in cost
accounting by the accountants, then total
cost is linear in volume, and given by: total
cost = fixed costs + unit variable cost *
amount.
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Total cost
1
Consequently total cost is fixed costs (FC) plus
variable cost (VC) or TC = FC + VC = Kr +wL.
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Total cost
1
In a survey of nearly 200 senior marketing
managers, 60 percent responded that they
found the variable and fixed costs metric
very useful.Farris, Paul W.; Neil T
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Variable cost
1
Fixed costs and variable
costs make up the two
components of total cost
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Variable cost - Example 2
1
In retail the cost of goods is almost entirely
a variable cost; this is not true of
manufacturing where many fixed costs,
such as depreciation, are included in the
cost of goods.
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Operational costs - Business operating costs
1
* fixed costs, which are the same whether
the operation is closed or running at 100%
capacity. Fixed Costs include items such
as the rent of the building. These generally
have to be paid regardless of what state
the business is in.
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No-load - United States
1
Fixed costs (such as rent or an audit fee)
vary on a percentage basis because the
lump sum rent/audit amount as a
percentage will vary depending on the
amount of assets a fund has acquired
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Ideal firm size - Variation in optimal firm size by industry
1
The diseconomies of scale do not tend to
vary widely by industry, but economies of
scale do. An auto maker has very high
fixed costs, which are lower per unit of
output the more output is produced. On
the other hand, a florist has very low fixed
costs and hence very limited sources of
economies of scale. Thus there are
disparate degrees of economies of scales
for different types of organizations.
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Capitalization rate - Explanatory Examples
1
For example, if a building is purchased for
$1,000,000 sale price and it produces
$100,000 in positive net operating income
(the amount left over after fixed costs and
variable costs is subtracted from gross
lease income) during one year, then:
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Fritz Machlup - Major works
1
* A Note on Fixed Costs,
1934, Quarterly Journal of
Economics (QJE).
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Contribution margin
1
“Contribution” represents the portion of
sales revenue that is not consumed by
variable costs and so contributes to the
coverage of fixed costs
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Contribution margin - Purpose
1
Contribution is different from gross margin
in that a contribution calculation seeks to
separate out variable costs (included in
the contribution calculation) from fixed
costs (not included in the contribution
calculation) on the basis of economic
analysis of the nature of the expense,
whereas gross margin is determined using
accounting standards
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Contribution margin - Construction
where TC = TFC + TVC is Total Cost =
Total Fixed Cost + Total Variable Cost and
X is Number of Units. Thus Profit is Unit
Contribution times Number of Units, minus
the Total Fixed Costs.
1
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Contribution margin - Construction
1
From the perspective of the matching
principle, one breaks down the revenue
from a given sale into a part to cover the
Unit Variable Cost, and a part to offset
against the Total Fixed Costs. Breaking
down Total Costs as:
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Contribution margin - Construction
1
Thus the Total Variable Costs \text = \text
\times \text offset, and the Net Income
(Profit and Loss) is Total Contribution
Margin minus Total Fixed Costs:
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Cost curve - Short-run average total cost curve (SRATC or SRAC)
1
Short run average cost equals average fixed
costs plus average variable costs. Average
fixed cost continuously falls as production
increases in the short run, because K is fixed
in the short run. The shape of the average
variable cost curve is directly determined by
increasing and then diminishing marginal
returns to the variable input (conventionally
labor).Perloff, J., 2008, Microeconomics:
Theory Applications with Calculus, Pearson.
ISBN 978-0-321-27794-7
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Cost curve - Cost curves and production functions
1
The short-run total cost curve is simply the variable
cost curve plus fixed costs
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Baltic Dry Index - Why economists and stock market investors read it
1
The supply of cargo ships is generally both
tight and elasticity (economics)|inelastic—
it takes two years to build a new ship, and
a ship's fixed costs are too expensive to
take out of circulation the way airlines park
unneeded jets in deserts
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British Island Airways - British Island Airways Mark One (1970–1980)
1
BIA hoped that the merger with Air Anglia, as well
as Air Wales and Air Westward, to form Air UK in
January 1980 would help it transform its financial
performance by counterbalancing BIA's
predominantly seasonal scheduled operations
across the Western half of the British Isles with Air
Anglia's year-round scheduled services linking
important petroleum industry|oil and gas industry
centres covering the Eastern half of United
Kingdom|Britain, as well as by spreading fixed
costs over a greater level of activity as a result of
the new airline combine's greater economies of
scale.Aircraft (Gone but not forgotten ..
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Monopolistic - Sources of monopoly power
* Capital requirements: Production
processes that require large investments
of capital, or large research and
development costs or substantial sunk
costs limit the number of companies in an
industry.Samuelson Marks (2003), p. 365.
Large fixed costs also make it difficult for a
small company to enter an industry and
expand.
1
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Monopolistic - Natural monopoly
1
A natural monopoly is an organization that
experiences Economies of
Scale|increasing returns to scale over the
relevant range of output and relatively high
fixed costs.Binger and Hoffman (1998), p
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British Motor Corporation - Post mortem
1
Because of the high proportion of auto-production
costs represented by fixed costs that needed to be
allocated over a planned production volume, and
the use in the 1960s of investment appraisal
criteria that were ill-suited to accounting for
volume fluctuations and the rapidly changing value
of the UK currency in the 1960s, the precise
figures quoted may be open to challenge, but the
new management's diagnosis that BMC's
profitability was insufficient to fund support and
new model investment to cover its disparate range
of brands and models was hard to refute.
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Us penny
1
Fixed costs and overhead would have to be
absorbed by other circulating coins without the
penny
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Unit cost
The 'unit cost' is the cost incurred by a
company to produce, store and sell one
unit of a particular product. Unit costs
include all fixed costs and all variable
costs involved in
production.http://www.investopedia.com/te
rms/u/unitcost.asp#axzz27lgOiykz
1
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Elkins Act - Impact
1
In an industry with decreasing marginal
costs and high fixed costs, it would be
futile to enforce a price cap
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Merger - The Great Merger Movement: 1895–1905
1
Due to high fixed costs, when demand fell,
these newly merged companies had an
incentive to maintain output and reduce
prices
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Water supplies - Costs and financing
1
The cost of supplying water consists, to a
very large extent, of fixed costs (capital
costs and personnel costs) and only to a
small extent of variable costs that depend
on the amount of water consumed (mainly
energy and chemicals)
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3D printer - Social change
With a huge potential global market to
amortize the upfront fixed costs of design
and testing, the incentives to invest [in
digital technologies] are compelling
1
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Dick Kovacevich
The higher revenues, relative to stable
fixed costs which this method produced
allowed Norwest to purchase many other
banks, culminating with the 1998 purchase
of Wells Fargo. Although Norwest was the
nominal survivor, the merged company
retained the better-known Wells Fargo
name. After the merger, he was given the
positions of president and CEO of Wells
Fargo. In 2001 Kovacevich was elected
chairman as well.
1
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Car costs
1
Fixed costs are those ones which do not
depend on the distance travelled by the
vehicle and which the owner must pay to
keep the vehicle ready for use on the road,
like Vehicle insurance|insurance or road
taxes
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Economics of automobile usage - Private costs
Of the annual running costs of an
automobile for the average person, 70–
75%Based on the breakdown of costs
given in the above mentioned RACV study
are fixed costs (with respect to distance
travelled): a 10% increase or decrease in
usage should result in a 2.5–3% increase
or decrease in annual running costs.
1
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Economics of automobile usage - Public benefits/costs
1
For instance, providing carpooling lanes to
cars with multiple passengers has
received attention as it helps reduce
traffic. carsharing|Sharing one or more
cars between many people reduces the
fixed costs per person and limits
extraneous vehicles; the use of fleet
vehicles affords savings through joint use
of a set of autos by a very large group of
persons either for business or pleasure.
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GNER - Financial issues
1
GNER had made its application partly on
the basis that 'open-access' train
operators (like Hull Trains) are not
required to meet the same fixed costs for
accessing Network Rail's infrastructure as
List of companies operating trains in the
United Kingdom|train operating companies
running services under a contract or
'franchise' with the Department for
Transport
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Edition (books) - Print run
1
Demand for additional print runs after the
first is always hoped for, because they
increase the book's overall profitability.
Once the fixed costs of developing,
editing, typesetting, etc., have been
covered by the first sales revenue, any
additional sales revenue tends to add to
the profit margin (minus, of course, the
costs of the additional materials, printing,
binding, and distribution).
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Efforts to eliminate the penny in the United States - Arguments for preservation
In a scenario where nickel production
doubled without the penny, Navigant
concludes that with existing fixed costs,
eliminating the penny would likely result in
increased net costs to the Mint of $10.9
million, relative to the current
state.Navigant Consulting: Impact of
Eliminating the Penny on the United
States Mint's Costs and Profit in Fiscal
year 2011 by Rodney J
1
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British Caledonian in the 1980s - Merger discussions
1
This prevented BCal from achieving higher volumes
over which to spread its fixed costs
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Model T Ford - Price and Production
1
The assembly line system allowed Ford to
sell his cars at a price lower than his
competitors due to the efficiency of the
system. As he continued to fine tune the
system, he was able to keep reducing his
costs. As his volume increased, he was
able to also lower the prices due to fixed
costs being spread over a larger number
of vehicles. Other factors affected the
price such a material costs and design
changes.
https://store.theartofservice.com/the-fixed-costs-toolkit.html
Kripalu Center - Administration and finances
We have very high
overhead and very high
fixed costs
1
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Available seat kilometre - Cost per ASM (CASM)
1
For instance, all other things being equal,
an airline with a longer
Airline_cost_glossary#StageLength|average stage length will have a
lower CASM, because fixed costs will
account for a lower portion of its total costs
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Contestable markets
However, if the new firm cannot use or
transfer the new machines that it bought
for the production of steel to other uses in
another industry, then these fixed costs on
machinery become sunk costs
1
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New York Waterway - Expansion and near bankruptcy
1
After PATH service was restored ridership
significantly declined, the loss of
passengers bringing the company, unable
to reduce its fixed costs, to brink of
bankruptcy
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Aid effectiveness - Why effectiveness matters
1
In fact, each project has fixed costs of
design, negotiation and implementation,
which reduce dollars available for final
beneficiaries.
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CancerVax - Reverse Merger
1
Because of high underwriting fees and the
fixed costs of going public through
investment banks, it is difficult for small
firms to go public via an IPO because of
insufficient liquidity gains
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Airline cost glossary - Stage-Length Adjustment
All other things being equal, the same
airline will have lower CASM, RASM and
yield as stage length increases, since fixed
costs are spread over increasingly larger
average flight lengths
1
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