Final answer:
To close the gap between estimated cost per unit and target cost per unit, companies should work on reducing average and marginal costs, while balancing the decision to produce or shut down based on a comparison between price and average variable cost.
Step-by-step explanation:
To close the gap between estimated cost per unit and target cost per unit, companies can adopt several strategies. One method is to reduce the average cost, which is the total cost (TC) divided by the quantity of output (Q), represented by AC = TC/Q. For instance, if producing two widgets costs $44 in total, the average cost is $22 per widget. Another method focuses on lowering marginal cost (MC), the cost of producing one additional unit, calculated as the change in total cost (ATC) divided by the change in output (AQ).
Efficient cost management involves analyzing whether to continue production or shut down when operating below the break-even point, where price equals average cost. Companies should aim to operate where the price is higher than the average variable cost to avoid losses. Effective estimation practices, understanding the relationships between variables, and strategic decision-making all contribute to reducing costs and meeting target cost objectives. Firms should explore cost reduction techniques such as optimizing production processes, implementing lean manufacturing, negotiating better terms with suppliers, or investing in cost-saving technologies to lower both average and marginal costs over time.