Cost, Revenue, and Profit Maximization Chapter 5, Section 3 Cost, Revenue, and Profit Maximization

Measures of Cost Categories Fixed cost Overhead Variable cost Total cost Marginal cost

Fixed Cost The cost that a business incurs (has) even if the plant is idle and output is zero.

Fixed Cost Continued… Includes: Salaries Rent payments/lease payments Local and state property taxes Depreciation

Overhead Another name for fixed cost. Yes it is as simple as that.

Variable Cost A cost that changes when the business rate of operation or output changes. Generally associated with labor and raw materials.

Variable Cost Continued… Example: Workers may have to work overtime. Extra power may be needed to run the plant longer or at higher rates.

Total Cost Sum of fixed and variable cost. Takes into account all the costs a business faces in the course of its operations.

Marginal Cost The extra cost incurred when a business produces one additional unit of a product.