Fixed and Variable Costs

In discussing break-even, the difference between fixed and variable costs becomes very important. As a result, we need to be a little more explicit about the difference than we have been so far.

variable costs

Costs that change when the quantity of output changes.

Variable Costs By definition, variable costs change as the quantity of output changes, and they are zero when production is zero. For example, direct labor costs and raw material costs are usually considered variable. This makes sense because if we shut down operations tomorrow, there will be no future costs for labor or raw materials.

We will assume that variable costs are a constant amount per unit of output. This simply means that total variable cost is equal to the cost per unit multiplied by the number

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

IV. Capital Budgeting

11. Project Analysis and Evaluation

© The McGraw-Hill Companies, 2002

CHAPTER 11 Project Analysis and Evaluation

Output Level and Variable Costs

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