Question

Controlling production costs are critical to any manufacturing company. Explain the difference between fixed and variable costs and how they interact with changes in volumes?

Short answer question, about a PG long. Thanks!

Answer 1

Variable Costs

A variable expense is an organization's cost that is related with the measure of merchandise or administrations it produces. An organization's variable cost increments and diminishes with the generation volume. For instance, assume organization ABC produces artistic mugs for an expense of $2 a mug. In the event that the organization produces 500 units, its variable cost will be $1,000. In any case, if the organization does not create any units, it won't have any variable expense for delivering the mugs.

Fixed Costs

Then again, a fixed expense does not fluctuate with the volume of creation. A fixed expense does not change with the measure of products or administrations an organization produces. It continues as before regardless of whether no merchandise or administrations are created. Utilizing a similar model above, assume organization ABC has a fixed expense of $10,000 every month for the machine it uses to deliver mugs. In the event that the organization does not create any mugs for the month, it would at present need to pay $10,000 for the expense of leasing the machine. Then again, on the off chance that it produces 1 million mugs, its fixed cost continues as before. The variable costs change from zero to $2 million in this model.