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vary in total with the number of output units -- even though costs per
unit remain the same.
Fixed, Variable, and Incremental Costs
• Incremental Cost: additional cost that results from increasing
output of a system by one (or more) units.
• Incremental cost is often associated with “go / no go” decisions
that involve a limited change in output or activity level.
EXAMPLE: the incremental cost of driving an automobile
might be $0.27 / mile. This cost depends on:
1. mileage driven;
2. mileage expected to drive;
3. age of car;
RECURRING AND NONRECURRING COSTS
• Recurring costs: repetitive and occur when a firm produces
• Variable costs are recurring because they repeat with each unit
of output.
cost:
Office space rental
RECURRING AND NONRECURRING COSTS
• Nonrecurring costs: not repetitive, even though the total
capacity to operate;
• Examples are purchase cost for real estate upon which a plant
The optimal demand at which maximum profit will occur by taking the
first derivative of the last Equation with respect to D and setting it
equal to zero:
Example
P 2-12. A company produces circuit boards used to update outdated
computer equipment. The fixed cost is $42,000 per month, and the
variable cost is $53 per circuit board. The selling price per unit is p
= $150−0.02 D. Maximum output of the plant is 4,000 units per
month.
a. Determine optimum demand for this product.
b. What is the maximum profit per month?
c. At what volumes does breakeven occur?
d. What is the company’s range of profitable demand?
Home Work Assignments
HW𝟐
1, 3 , 9 ,13 ,14 ,15 ,17 , 19
Deadline 2/11/2014