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The total costs of production

The total costs of production of producing a certain good is determined by the sum of its variable and fixed costs. The said two type of cost depends on the level of sales volume. There are instances that in the long run, variable costs becomes fixed costs. Like when the company agreed to pay the and hire the CEO for ten years, then, the costs of labor of the CEO serves as a fixed costs for the company since it was agreed that the contract would last in ten years regardless even if the company faces a financial crisis or depression.

Variable cost is defined as the factor of production that changes according to the level of production like the costs of labor, input costs etc (investorwords. com, 2007b). In other words, variable cost is flexible for every corresponding change in the condition of the market (King, 2007). Fixed cost is the part of the total costs that does not changes unlike the variable costs like land, building, tax etc. it is the costs the needed to be fulfilled first before the variable costs (investorwords. com, 2007a).

Fixed costs is also covered if the company or the business only break-even in the operation. Another definition would be, a long term costs that can only be recovered through exhausting them in making of the goods or merchandise of the company (teneric. co. uk, 2007). For instance, labor is more flexible than with machineries. It is very easy for us to change the designated assignment of responsibility in the production line, while machinery needs much more commitment since we have to make necessary adjustments first in order to for the machines to be qualified into performing the work.

According on the situation, the concerned company is a restaurant with annual sales of 1000 units of their goods. Moreover, it is also included in the situation that the total annual costs of producing hamburgers costs 650 while the building rent would be equal to 9000. Based from the given data above, we can say that the total cost of producing 1000 units of their goods is equivalent to 9650.

It is obvious that the variable costs here is the costs of the raw materials that were use in making hamburgers since it is easy for us to change the raw materials that were going to use in making hamburgers. Unlike the machineries, which is the fixed cost, which is hardly to change one from another since of their value and less “movable” as compared to the raw materials. The corresponding total per unit cost of fixed costs is equivalent to 9 whereas the total per unit costs is equivalent to 0. 65.

As for the total annual cost of fixed costs, it is equal to 9000 and the annual cost of variable costs is equivalent to 650. This means that the total cost of producing one hamburger is equal to 9. 65 which already include the fixed and variable costs. Now, supposed that the sales volume increased from 1000 to 6000. this would mean that the raw material that had been used increased. This can happen when a company or business entity starting to gain increase in the demand of their goods. The corresponding per unit costs still equivalent to 0.

65 and the corresponding per unit cost of fixed costs is equivalent to 1. 5. The total annual cost of variable costs is 3900 while the fixed cost is 9000. If the sales volume again increased, from 1000 to 8000, the corresponding per unit costs of one hamburger is equal to 0. 65 and the corresponding per unit costs of fixed costs is equivalent to 1. 125. The total annual cost of variable costs is 5200 while fixed cost is 9000.

REFERENCES

investorwords. com. (2007a). fixed cost [Electronic Version]. Retrieved August 20, 2007 from http://www.investorwords. com/1992/fixed_cost. html. investorwords. com. (2007b). variable cost [Electronic Version], 1. Retrieved August 20, 2007 from http://www. investorwords. com/5221/variable_cost. html. King, W. (2007). Fixed and Variable Costs [Electronic Version], 1. Retrieved August 20, 2007 from http://william-king. www. drexel. edu/top/Prin/txt/Cost/cost2. html. teneric. co. uk. (2007). What costs are fixed [Electronic Version], 1. Retrieved August 20, 2007 from http://www. teneric. co. uk/nl110204. html.

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