Explain why fixed and variable costs per unit decline as sales volume increases. Suppose a company had a variable cost/unit of $20 at a cumulative volume of 20,000 units. What would be their approximate variable cost per unit when they had produced 40,000 units?

Question

For example:

Fixed Cost = $800,000
Unit Volume = 20,000

$800,000/20,000 = $40 Total Fixed Cost per Unit

Compared to…
Fixed Cost = $800,000
Unit Volume = 40,000

$800,000/40,000 = $20 Total Fixed Cost per Unit

Cost is reduced by half, but I’m not sure how to really explain this. Would I just say “the greater the unit volume the lower the cost, since fixed cost is divided by the unit volume?”

As for variable cost I’m not sure how to explain how it is reduced as sales volume is increased. Help please! Thanks!

Answer 1

You did well on the fixed costs.

Now remember your variable costs are often for supplies form a jobber, and he has fixed costs and variable costs. As your volume increases, you order more, so his fixed costs are spread across a higher volume, so he can give you "volume" discounts, and this lowers your variable costs.

FOr instance, you use zerox paper in a printing job. Variable costs equal the cost of the paper and ink per page. However, instead of a ream of printing, your job is 10,000 reams of printing: your cost of paper goes down, because your supplier can give you volume discounts (he saves on delivery, handling, and so on).