Fixed Costs, Variable Costs, and Their Impact on Business

This report analyzes the concepts of fixed and variable costs, detailing their distinctions and implications for business operations. The report begins by defining fixed costs as those that remain constant regardless of production levels, such as rent, and variable costs as those that fluctuate with production, like raw materials. It emphasizes that in the short run, businesses focus on minimizing variable costs to manage fixed costs. The report then contrasts the short-run perspective with the long run, where economic factors can influence fixed costs, making the distinction less clear. Examples are provided, including the costs associated with owning a car and the costs associated with air travel. The report highlights the impact of these costs on decision-making and overall financial planning. The provided references support the analysis of fixed and variable costs within the context of business and economics.

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Running head: FIXED COST
Fixed Costs and Variable Costs
Name
Institution

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FIXES COST
1.
In the short run there are no fixed costs since organizations minimize on the variable costs to
meet the fixed costs at the end of the period. Fixed cost refers to the expenses that do not change
with an increase in the level of production or other internal conditions. Rent is an example of
fixed cost in an organization. Even if the level of production increases or decreases, the
organization will still pay the standard rent arrears (Chen & Koebel, 2017). On the other hand,
variables cost are those that change with the changes in the level of production. Cost of raw
materials is one of the variable costs in an organization. A decrease in the level of production
will lead to a significant reduction in the cost of raw material.
Fixed costs are recorded at the end of the period; therefore, they do not affect the production
costs in the short run. For instance, a company may pay Rent either monthly or yearly. For those
that pay such fixed costs annually, it would be challenging to distinguish between the fixed cost
and variable costs before the end of the financial year. In this case, the fixed costs include;
interest on the company-issued bond, real estate taxes, executive salaries, insurance premiums,
wage payments, depreciation and obsolescence charges, and rental payments on leased
machinery (Gu et al., 2017). The variable costs include advertisement expenditures, fuel,
shipping charges, sales taxes, and payment of raw materials. There is no fixed cost in the long
run because the long run refers to a long time in which thing is subject to changes. Economic
factors are likely to influence the fixed costs in the long run. For instance, government regulation
on rental payments and taxes will impact the fixed cost of an organization. If the government
increases the rate of property tax, the organization will have to pay more than expected. Based on
such reasons, there are no fixed costs in the long run.

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FIXES COST
2.
Some of the fixed costs of owning and using a car are the price of the car, insurance and road
taxes. The owner needs to pay for these costs, irrespective of the distance travelled. On the other
hand, the variable costs include fuel costs, cleaning and maintenance or oiling. When deciding to
fly to Casablanca, I will consider the cost of an air ticket which is fixed depending on the airline
company that I will consider. Ideally, the airline will charge a specific amount from my location
to Casablanca. I will also consider the cost of fuel which is variable depending on the distance to
Casablanca. If I take the shortest distance, I will spend less on fuel. Other implicit costs will be
relevant; if I decide to fly, I may be charged for my luggage. Consequently, I may pay road taxes
when I choose to drive.

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FIXES COST
References
Chen, X., & Koebel, B. M. (2017). Fixed cost, variable cost, markups and returns to scale.
Annals of Economics and Statistics/Annales d’Économie et de Statistique, 127, 61–94.
Gu, T., Simunic, D. A., & Stein, M. T. (2017). Fixed Costs, Audit Production, and Audit
Markets: Theory and Evidence.