2.3 Cost Functions

The function used as an example in this chapter, which gives cost in terms of a number of posters, has some elements typical of cost functions. Cost functions give the cost of an activity, usually in terms of some measurement of a level of activity.

The fixed cost is the cost that must be paid no matter how low the measured level of activity (the cost at zero). For the posters the fixed cost was the $80.00 for artwork and set-up, since these things would have to be done even if only one poster was produced.

The variable cost is the part of the cost that changes with the level of activity. For linear cost functions, the variable part of the cost changes directly with the level of the activity. In the poster example, the variable cost is $0.11x. The $0.11 per poster is called the variable cost per unit. The fact that the variable cost per unit is the same for all units makes the function linear.

• The fixed cost is usually denoted by F or FC.
• The variable cost per unit is usually denoted by V or VC.

If you take x to be the number of units produced, then you have the following as a general formula:

[latex]C=FC +VC x[/latex]

Thus, for the poster example:

• FC = $80.00
• VC=$0.11 per poster
• x = number of posters

Hence,

[latex]C =$80 +$0.11x[/latex]

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