Final answer:
Using managerial judgment to separate fixed and variable costs can simplify the process by eliminating the need for advanced data analytics, but it does not guard against errors and relies heavily on the manager's understanding of the company.
Step-by-step explanation:
An advantage of using managerial judgment to separate fixed and variable costs is that it eliminates the need for advanced data analytics. This approach can be simpler than methods requiring extensive data analysis and may be more practical for managers who have a deep understanding of their company's costs and operations. However, it is important to note that this method does not prohibit errors; human judgment can be subject to biases and inaccuracies. Moreover, the level of understanding that the manager has of the specific company does indeed come into play, as this insight is critical to making informed decisions on the nature of costs.
Breaking down total costs is essential as it allows a firm to understand the behavior of costs in relation to changes in production level and to make strategic decisions. For example, in a short-run perspective, fixed costs, which are considered sunk costs, do not change with the level of production and therefore do not influence decisions on future production or pricing. On the other hand, variable costs often exhibit diminishing marginal returns, meaning that as production increases, the incremental cost of producing each additional unit may rise.