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produces no shirts it has incurred those costs. Similarly, even if the total cost of producing 1 shirt is greater than the revenue from selling the shirt, the business would produce the shirt anyway if the revenue were greater than the variable cost. If the revenue that it is receiving is greater than its variable cost but less than its total cost, it will continue to operate while accruing an economic loss. If its total revenue is less than its variable cost in the short run, the business should shut down. If revenue is greater than total cost, this firm will have positive economic profit.
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87:, it is necessary to know how costs divide between variable and fixed. This distinction is crucial in forecasting the earnings generated by various changes in unit sales and thus the financial impact of proposed marketing campaigns. In a survey of nearly 200 senior marketing managers, 60 percent responded that they found the "variable and fixed costs" metric very useful.
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used in production. However, over a six-month horizon, the factory will be better able to change the amount of labor to fit the desired output, either by using overtime hours, laying off employees, or hiring new employees. Thus, much of their labor becomes a variable cost - though not the cost of the managers, whose salaries are paid regardless of output.
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Over a five-year horizon, all costs can become variable costs. The business can decide to shut down and sell off its buildings and equipment if long-run total cost exceeds their long-run total revenue, or to expand and increase the amount of both of them if their long-run total revenue exceeds their
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The amount of materials and labor that goes into each shirt increases with the number of shirts produced. In this sense, the cost "varies" as production varies. In the long run, if the business planned to make 0 shirts, it would choose to have 0 machines and 0 rooms, but in the short run, even if it
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Over a one-day horizon, a factory's costs might largely consist of fixed costs, not variable. The company must pay for the building, the employee benefits, and the machinery regardless of whether anything is produced that day. The main variable cost will be materials and any energy costs actually
129:, and 8 hours of a laborer's time with 6 yards of cloth to make a shirt, then the cost of labor and cloth increases if two shirts are produced, and those are the variable costs. The facility and equipment are fixed costs, incurred regardless of whether even one shirt is made.
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Thus, which costs are classified as variable and which as fixed depends on the time horizon, most simply classified into short run and long run, but really with an entire range of time horizons.
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long-run total cost, which would include their variable costs. It can change its entire labor force, managerial as well as line workers.
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are costs that change as the quantity of the good or service that a business produces changes. Variable costs are the sum of
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endorses the definitions, purposes, and constructs of classes of measures that appear in
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Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; David J. Reibstein (2010).
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Garrison, Noreen, Brewer. Ch 2 - Managerial
Accounting and Costs Concepts, pp 39
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Garrison, Noreen, Brewer. Ch 2 - Managerial
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Some common examples include sales commission, labor costs, and the costs of
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Marketing
Metrics: The Definitive Guide to Measuring Marketing Performance
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over all units produced. They can also be considered normal costs.
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are costs that can easily be associated with a particular
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Garrison, Ray H; Eric W. Noreen; Peter C. Brewer (2009).
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