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How do we deal with semi-variable costs containing a stepped fixed element?

A. Allocate only the variable portion.
B. Allocate only the fixed portion.
C. Allocate both variable and fixed portions.
D. Ignore the semi-variable costs.

User Brien
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Final answer:

The correct approach for semi-variable costs is to allocate both the fixed and variable portions. This accounts for the costs' two components, which are essential for calculating a firm's overall cost structure.

Step-by-step explanation:

When dealing with semi-variable costs that have a stepped fixed element, the correct approach is to allocate both variable and fixed portions, as per option C. This is because semi-variable costs consist of a fixed component, which does not change with the level of production, and a variable component that does change based on production volume. When calculating the cost structure of a firm, one should calculate total cost, average variable cost, average total cost, and marginal cost while accounting for both fixed and variable expenses. The fixed costs, such as rent on a factory, remain constant regardless of production levels, while the variable costs might show diminishing marginal returns, leading to a rise in the marginal cost of producing higher levels of output.

For example, let's say a company has a semi-variable cost of $1,000 per month, with $800 being the fixed portion and $200 being the variable portion. If the company produces 100 units in a month, it can allocate $8 (fixed portion = $800 / 100) per unit as fixed cost and $2 (variable portion = $200 / 100) per unit as variable cost.

User Paul Rey
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