Company Cost Structure

In order to see how the costs and income interact in order to determine economic benefits or losses, economy experts like to divide the total costs of a company into two subcategories, which are:
  • The Fixed Costs are the costs that need to be paid even if the company is not producing anything. An example of this is when a new contract for rent has been sign for the location of a company and the person that has rented needs to pay it whether the company is producing or not producing. In the same way, if the company has asked for a loan, legally this person would have to make the debt payments and this is independent from the amount he or she is making.
  • The Variable Costs are the costs that vary with the amount of the product. Lets say for example that you are in the orange juice business and decide you are not going to produce anything just yet, if such were the case, you would not have to go out and buy oranges. However, the more orange juice you make, the more oranges you have to buy. In the same way, the more orange juice you produce means you have to get more workers and employees to do the job so this means that your labor costs will also vary depending on the amount that is finally produced.

Fixed costs can be represented by FC and the variable costs by VC, that, when added up together are the total costs of the company, for example:

TC = FC + VC

By looking at the previous equation, remember that it refers to the economic costs that the company faces and so it captures the opportunity costs of the expenses of the company, both of the fixed costs as well as the variables. All expenses, whether they are fixed or variable, have opportunity costs, which are the other things a person sacrifices to spend the money on fixed costs and variables.  

Product Unit Costs: The reason that economy experts differentiate the fixed costs and the variables is because each one of these has very different effects on the decision of a company in relation with how much to produce.

When a company becomes established they have certain things and implements they need to buy and this generates a fixed cost for them. Then they need to decide how much of their good to make, in this case we were using orange juice as an example, therefore the company would need to buy a juice extractor and once this has been obtained they decide how much juice to make. This at the same time determines how many workers or employees the company has to hire. As more workers are hired, the amount of product increases as well as the costs to pay those workers.

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