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Hi there,
the textbook says the following – please help me understand what’s in the brackets.
textbook: For output volumes above 350 units the variable cost per unit falls by 10. (Note: this fall applies to all units – not just the excess above 350)
what the heck does it mean when it says it applies to all units above 350? doesn’t this just contradict the statement that above 350 units there is a 10% fall in variable cost?
Thank you
sorry I mean when it says it applies to all units “not just the excess above 350.” Doesn’t this contradict the original statement?
It does not contradict.
It means that if there are fewer than 350 units, then all the units will have one cost. If there are more that 350 units, then all of the units will have the lower cost.
but it says the fall of 10% applies to all units not just the excess above 350 units. However it says the fall of 10% occurs when output is above 350 units.
Yes,the total cost of producing 351 units will be less than the cost of producing 350 units.It is a downward stepped cost which is being described.It could,for instance, describe a royalty agreement which contains this kind of costing clause.A similar situation sometimes happens with supermarket meal deals in which you have to select four items for a set price.Sometimes forgetting to select one of the items can result in paying more than the set deal price.Hope this helps.
It isn’t a stepped cost – stepped costs (upwards or downwards) refers to fixed costs.
However the rest of what mrjonbain has written is correct.Suppose the variable cost is $20 per unit. The question is saying that provided they produce fewer than 350 units, then all units will cost $20.
However if they produce more than 350 units, then all 350 units will cost $18 per unit (i.e. 10% less). Although the 10% reduction only applies if they produce more than 350 units in total, it applies to all of the units produced (not just the extra units above 350).
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