In order for a company to determine the point of production in which it can maximize profit, it must first identify it’s costs.
There are many different types of costs that are associated with operating a business. Some are incurred only once, some are incurred everyday and some costs are associated with the long-term success of the business itself. Organizations attempt to identify all of their costs in order to also identify where they can save money by lowering their costs. Running an efficient business means that you are spending only what is necessary in order to receive a greater return.
Fixed costs takes into account money that the company has to pay no matter what. Even if they don’t produce anything and aren’t making any kind of profit, these costs are incurred. They are associated with the actual existence of the company themselves such as rent for the space it is using or labor costs for the employees who are working there. There is no way to control these costs. Variable costs on the other hand are costs that change with the amount of products that companies are producing. This includes the amount of electricity or materials that can fluctuate with a greater output or decrease with less output. Variable costs can be monitored and controlled in the short-term by changing the level of production or achieving higher means of efficiency. Total cost is the sum of total fixed costs and total variable costs.
Average fixed costs (AFC) is found by dividing the total fixed costs by the quantity of goods produced. Average fixed costs decline as the quantity being produced increases and helps a company to determine how much of their fixed costs are incurred per unit produced. The total fixed costs are spread across a large quantity of output. Average variable costs (AVC) area found by dividing the total variable cost by the quantity of goods produced. The average total cost (ATC) is the sum of the AVC and AFC. It has been found that production isn’t efficient or cost-effective at lower quantities of output. Visit Agency Fusion Utah today for additional financial tips.
Marginal cost is the additional potential cost of producing exactly one more product. It can be controlled by choosing whether or not to produce that additional unit. It is calculated by dividing the change in total cost by the change in the amount produced. It helps an organization identify where it can save money. A profit-maximizing company is one where the marginal cost equals the marginal revenue.