I have a general idea what it is but does anyone have a definition? I want to know why fixed costs decline as CU increases and why at very high rates of CU the firm may be forced to use less efficient labor and plant resources. Thanks.
How about: per unit. Doesn’ this help?
Fixed Costs will decline as you increase production to full capacity as the cost will be spread over more units of output. As for the second part, at very high rates of CU, labor may become less efficient if productivity declines. Btw, what is the context?
Context is a question in Schweser: Disucss the r’ship between stock market profits and capacity utilization.
Your total fix cost is FIXED, as you increase your capacity utilization, you produce more product (unit) therefore, your per unit cost goes down. However, due to the principle of “diminishing return”, eventually you hit a limit.
Dude i get what fixed cost is. i asked for a definition of capacity utilization. the reason being i would expect profits to increase at a decreasing rate. but the text says the profit actually comes down at very high CU. dude. word.
Also, during climb out of recession there’s lots of CU, so production can increase without much labour cost increase so profits rise quickly during this phase. Once you have no CU, you have to pay overtime, add an overnite shift, etc. which eats into profit.
Also, when workers are overutilized, their efficiency goes down so to maintain a certain level of production, more workers need to be hired. This will increase the cost per unit. If production is high, the firm may have to find suboptimal materials in order to maintain the level of production. This could lead to higher production costs and a lower quality product so possibly lower profits.