Question

We are comparing two systems. System 1 has a high fixed cost and low variable costs. System 2 has low fixed costs and high variable costs. If the quantity of a product is small, which system would be preferred? If the quantity of a product is large, which system would be preferred? Explain each answer briefly.

Answer 1

System 2 with low fixed costs and high variable costs is preferred for small quantities, while System 1 with high fixed costs and low variable costs is preferred for large quantities due to the average cost per unit decreasing as production volume increases.

Step-by-step explanation:

When comparing two systems, one with high fixed costs and low variable costs (System 1), and the other with low fixed costs and high variable costs (System 2), the preferred system depends on the quantity of product being produced. If the quantity is small.

System 1 with high fixed costs would not be preferred because the business has not produced enough output to spread out and recover the higher fixed costs. Instead, System 2 would be preferred due to its low fixed costs, which make it more economical for producing a small quantity of goods.

Conversely, if the quantity of the product is large, System 1 becomes preferred. Since System 1 has low variable costs, the total cost per unit decreases as the quantity produced increases.

A high volume of production allows the firm to spread out its fixed costs over many units, reducing the average cost per unit and making this system more cost-effective for large-scale production.