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Fixed Cost Vs. Variable Cost

Can you help me explain this fixed and variable cost problem? I am not too sure how to go about answering this question.

Problem: Organizations typically have high or low fixed costs. It is important to understand the difference between these two types of organizations and how their business decisions differ. One organization (American Airlines) must have high fixed costs and low variable costs, and the other organization (Netflix) must have low fixed costs and high variable costs. Companies with high fixed costs include manufacturing companies, whereas service companies might have low fixed costs. Chart the relationship between total cost and the number of units for each organization. Plot two lines on the graph: one for the organization that has high fixed costs and low variable costs, and one for the organization that has low fixed costs and high variable costs.

Make sure to:
- Explain how to balance fixed and variable costs.
- Explain Production Possibilities.

Solution Preview

Refer to the attachment to view the graph.
Step 1
There are two sets of lines on the graph. Organization A is the firm that has low fixed costs and high variable costs. The total cost curve of this organization is raising steeply because of high variable costs. Organization B is a firm that has high fixed costs and low variable costs. The total cost curve of B is less steep than that of A because organization B has low variable costs.
Step 2
There is a need to balance fixed and variable cost. In case of high fixed costs, the fixed costs are spread over a ...

Solution Summary

This posting gives you a step-by-step explanation of fixed and variable cost problem. The response also contains the sources used.

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