Final answer:
Costs in manufacturing are typically split into fixed costs, like rent, which remain the same regardless of production levels, and variable costs, like labor, which change with production volume. Understanding these costs is essential for economic decision-making.
Step-by-step explanation:
Costs incurred by a manufacturing company are often classified into two groups: fixed costs and variable costs. Fixed costs are expenditures that do not change regardless of the level of production, such as rent on a factory, the cost of machinery, or research and development costs. Variable costs, on the other hand, are costs that vary with the level of output; these include raw materials, labor, and utilities. Both types of costs are crucial for determining the cost structure of a business and play a pivotal role in deciding pricing strategies and business operations.
Fixed costs are considered sunk costs; they have already been incurred and cannot be changed, therefore they should not factor into future economic decisions regarding production or pricing. On the other hand, variable costs often exhibit diminishing marginal returns, meaning as production increases, the marginal cost for each additional unit tends to rise.