Chapter Seven at Hamburg School Of Business Administration | Flashcards & Summaries

Lernmaterialien für Chapter Seven an der Hamburg School of Business Administration

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Fixed Costs vs. Sunk Costs

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Fixed Costs

  • can be avoided if firm goes out of business 
  • affect the firm's decision looking forward 
  • high relative to revenue 


Sunk costs

  • costs that have been incurred and cannot be recovered 
  • it should not influence a firm's decision


Prospective Cost

  • does affect the firm's decision looking forward 
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Economic Cost

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Cost to a firm of utilizing economic resources in production


-> including accounting and opportunity costs

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Average Fixed Cost (AFC)

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Fixes cost decided by the level of output.

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Prospective sunk cost

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investment 


-> firm must decide whether that investment is specialized equipment is economical

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Total Cost (TC)

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Total economic cost of production, consisting of FC and VC.

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Fixed Cost (FC)

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Cost that does not vary with the level of output and that can be eliminated only by shutting down (going out of the business)

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Variable Cost (VC)

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Cost that varies as output varies. 

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Shutting Down

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Does not mean going out of business.


  • by reducing output to zero, company could eliminate costs of materials and labor, but it would still incur the fixed costs (manager, security guards)
  • only way to eliminate those costs: going out of business 
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TESTE DEIN WISSEN

Fixed or Variable Cost?

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Fixed Cost

  • short period of time (a few month)


Variable Cost

  • very long time horizon (ten years)


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Amortization 

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TESTE DEIN WISSEN

Policy of treating a one-time expenditure as an annual cost spread out over some number of years. 


Abschreibung/Tilgung

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Average Variable Cost (AVC)

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Variable cost divided by the level of output.

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Opportunity Cost

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Cost associated with opportunities forgone when a firm's resources are not put to their best alternative use. 

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Q:

Fixed Costs vs. Sunk Costs

A:

Fixed Costs

  • can be avoided if firm goes out of business 
  • affect the firm's decision looking forward 
  • high relative to revenue 


Sunk costs

  • costs that have been incurred and cannot be recovered 
  • it should not influence a firm's decision


Prospective Cost

  • does affect the firm's decision looking forward 
Q:

Economic Cost

A:

Cost to a firm of utilizing economic resources in production


-> including accounting and opportunity costs

Q:

Average Fixed Cost (AFC)

A:

Fixes cost decided by the level of output.

Q:

Prospective sunk cost

A:

investment 


-> firm must decide whether that investment is specialized equipment is economical

Q:

Total Cost (TC)

A:

Total economic cost of production, consisting of FC and VC.

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Q:

Fixed Cost (FC)

A:

Cost that does not vary with the level of output and that can be eliminated only by shutting down (going out of the business)

Q:

Variable Cost (VC)

A:

Cost that varies as output varies. 

Q:

Shutting Down

A:

Does not mean going out of business.


  • by reducing output to zero, company could eliminate costs of materials and labor, but it would still incur the fixed costs (manager, security guards)
  • only way to eliminate those costs: going out of business 
Q:

Fixed or Variable Cost?

A:

Fixed Cost

  • short period of time (a few month)


Variable Cost

  • very long time horizon (ten years)


Q:

Amortization 

A:

Policy of treating a one-time expenditure as an annual cost spread out over some number of years. 


Abschreibung/Tilgung

Q:

Average Variable Cost (AVC)

A:

Variable cost divided by the level of output.

Q:

Opportunity Cost

A:

Cost associated with opportunities forgone when a firm's resources are not put to their best alternative use. 

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