Can you please explain the statement with an example? Also, check whether my understanding of the example is correct. "If using the same unit fixed costs at different output levels, managers may reach erroneous conclusions. Total fixed costs should be used."
Can you please explain the statement with an example? Also, check whether my understanding of the example is correct.
"If using the same unit fixed costs at different output levels, managers may reach erroneous conclusions. Total fixed costs should be used."
My Understanding:
For example, if the capacity is 1000 and currently we produce 1000 units and sell it for $20 per unit, variable cost $5 and the fixed cost $10 per unit (within the relevant range); and we have a special order to produce 1200 units for $8 per unit. Should we include additional the Total Fixed Cost of $10000, which is (10*1000) for the range (1001-2000) plus $10000 for the range (0-1000), which means, we will have a total fixed cost of $20000.
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