Final answer:
The major planning challenge for fixed overhead is choosing the appropriate level of capacity, as it determines how the fixed costs are allocated across units produced. The average fixed cost curve typically decreases as output increases, illustrating the 'spreading the overhead' concept.Correct option is C.
Step-by-step explanation:
The major challenge when planning fixed overhead is choosing the appropriate level of capacity. When it comes to fixed overhead, which is a common name for fixed costs, the difficulty lies in deciding how much capacity the company should plan for. Fixed costs do not change with the level of production. For instance, if the fixed cost is $1,000, dividing this by the quantity of output produced results in the average fixed cost.
When visualizing this, the average fixed cost curve would typically appear as a hyperbolic shape, decreasing as output increases. This is because the fixed cost is being spread over more units. The concept of spreading the overhead means allocating the fixed cost over the number of units produced. As more units are made, the cost per unit decreases, reflecting the notion of economies of scale.
Total costs are calculated by adding fixed costs to variable costs. In the example of 'The Clip Joint' barber shop, fixed costs (such as rent and equipment) are constant at $160 per day, while variable costs (like labor) change with the number of barbers hired. Using the provided data, one can calculate total cost, average variable cost, average total cost, and marginal cost for the business.