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Fixed and variable costs

Fixed costs, like rent, do not change with the quantity produced. Variable costs, like raw materials, increase with the number of units produced. Together they give total cost, and the average cost per unit falls as fixed costs are spread over more units.

TC=FC+VC⋅QTC = FC + VC\cdot Qtotal cost
Cˉ=FC+VC⋅QQ\bar{C} = \frac{FC + VC\cdot Q}{Q}average cost per unit

Symbols

FCFCfixed costskr
VCVCvariable cost per unitkr
QQquantity producedunits

Example

FC=20.000FC = 20.000 kr, VC=50VC = 50 kr/unit, Q=2000Q = 2000:

Cˉ=(20000+50⋅2000)/2000=60\bar C = (20000 + 50\cdot 2000)/2000 = 60 kr per unit.

Economies of scale come precisely from fixed costs being spread over more units as volume increases.
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Part of Engineering Economics: Costs and profitability.