Question

In the following cost formula Y = A + Bx, what does the "A" represent?

a) Total variable cost
b) Variable cost per unit
c) Total cost
d) Total fixed cost

Answer 1

In the cost formula Y = A + Bx, 'A' represents the total fixed cost, which does not change with the level of production.

Step-by-step explanation:

In the cost formula Y = A + Bx, where Y represents the total cost, Bx represents the variable cost (where B is the variable cost per unit and x is the number of units), the A stands for the total fixed cost. This represents the portion of the total cost that does not change with the level of production, such as rent, salaries of permanent staff, and depreciation. These costs are incurred even when the production level is zero. On the other hand, variable costs change with the level of production and can include things like raw materials and hourly wages for part-time workers. An example is the case of a barber shop where the fixed costs include the space and equipment costs, and variable costs include the wages paid to barbers.