Originally Posted by RRHemi
If output goes up fixed costs per unit go down, since they are spread across more units. If Chrysler is buying say, sheet metal for fenders, they will get a better price break if they are buying higher quantity. Wouldn't this lower variable costs or do both factors affect fixed costs?
cost per unit will go down -- fixed cost will stay the same if output goes up due to economies of scale. Fixed cost is usually comprised of overhead, rent, loans, insurance, etc. So if fixed cost goes down that means a company is laying off employees or stopped paying rent.
A better example (very hypothetically speaking/typing
) is that it costs Chrysler $1,000,000 to produce 1,000,000 cars per year (that's $1.00 per car). This $1,000,000 includes $500,000 in fixed cost ($0.50 per car). Fixed cost includes overhead, insurance, marketing expense, rent. As well as $500,000 in Variable cost (raw materials, delivery of said product, labor directly involve with the product).
Now lets say next year Chrysler decides to produce 2,000,000 cars. The Variable cost will increase because the number of cars has increased. Thus, variable cost rises from $500,000 to $1,000,000 (2,000,000 X $0.50 = $1,000,000). Fixed cost will not change regardless of the number of cars produced, thus it stays at $500,000.
The total cost to produce 2,000,000 cars will rise to $1,500,000 and the cost per car will fall to $0.75 ($1,500,000/2,000,000 cars). Because the fixed costs have been spread over a larger number of cars, the net cost per car will decline from $1.00 to $0.75.
Sorry guys that me and RRHemi thread jacked -- it was not intentional.