Explain why fixed and variable costs per unit decline as sales volume increases. Suppose a company had a variable cost/unit of $20 at a cumulative volume of 20,000 units. What would be their approximate variable cost per unit when they had produced 40,000 units?

For example:

Fixed Cost = $800,000
Unit Volume = 20,000

$800,000/20,000 = $40 Total Fixed Cost per Unit

Compared to…
Fixed Cost = $800,000
Unit Volume = 40,000

$800,000/40,000 = $20 Total Fixed Cost per Unit

Cost is reduced by half, but I’m not sure how to really explain this. Would I just say “the greater the unit volume the lower the cost, since fixed cost is divided by the unit volume?”

As for variable cost I’m not sure how to explain how it is reduced as sales volume is increased. Help please! Thanks!

You did well on the fixed costs.

Now remember your variable costs are often for supplies form a jobber, and he has fixed costs and variable costs. As your volume increases, you order more, so his fixed costs are spread across a higher volume, so he can give you "volume" discounts, and this lowers your variable costs.

FOr instance, you use zerox paper in a printing job. Variable costs equal the cost of the paper and ink per page. However, instead of a ream of printing, your job is 10,000 reams of printing: your cost of paper goes down, because your supplier can give you volume discounts (he saves on delivery, handling, and so on).

To understand why fixed and variable costs per unit decline as sales volume increases, we need to understand the concepts of fixed costs and variable costs.

Fixed costs are expenses that remain constant regardless of the level of production or sales volume. These costs include items like rent, salaries of administrative staff, and insurance. Fixed costs do not vary with changes in production or sales volume.

Variable costs, on the other hand, are expenses that change in proportion to the level of production or sales volume. These costs include items like raw materials, direct labor, and utility expenses. As more units are produced or sold, variable costs increase.

Now, let's focus on why both fixed and variable costs per unit decline as sales volume increases:

1. Fixed costs per unit:
As the sales volume increases, the fixed costs remain the same. However, since the sales volume is divided over a larger number of units, the fixed costs per unit decrease. This happens because the fixed costs are spread out over a greater number of units, resulting in a lower per-unit cost.

For example, let's take the case you mentioned:
Fixed Cost = $800,000
Unit Volume = 20,000
$800,000/20,000 = $40 Total Fixed Cost per Unit

Now, let's assume the unit volume increases to 40,000 units:
Fixed Cost = $800,000
Unit Volume = 40,000
$800,000/40,000 = $20 Total Fixed Cost per Unit

As you can see, when the unit volume doubles, the fixed cost per unit is reduced by half.

2. Variable costs per unit:
Variable costs per unit also tend to decline as sales volume increases. This is because certain variable costs, such as material costs and direct labor costs, often exhibit economies of scale.

Economies of scale occur when production or sales volume increases, allowing the company to benefit from cost efficiencies. For example, bulk purchasing of raw materials at lower prices or improved efficiency in production processes can lead to lower variable costs per unit.

To summarize, when sales volume increases, both fixed and variable costs per unit decline. Fixed costs per unit decrease because they are spread over a larger number of units, resulting in a lower per-unit cost. Variable costs per unit decline due to economies of scale and cost efficiencies that come with increased production or sales volume.

In relation to your example, if a company had a variable cost per unit of $20 at a cumulative volume of 20,000 units, it is likely that their variable cost per unit when producing 40,000 units would be lower. However, without further data or information, we cannot provide an exact figure.