Steel production involves a large amount of fixed costs. Since competition is defined primarily in terms of price, steel manufacturers (and many of their manufacturing and service industry counterparts) try to gain a competitive advantage by using economies of scale and investment in technology to increase productivity and drive unit costs lower. Their substantial fixed costs are the result of their size.

Required:

1. The team should discuss and then write descriptions of the definitions of fixed costs and variable costs.

2. Each member of the team should select one of the following types of businesses and do the following: (i) give examples of fixed costs and variable costs that would be incurred by that type of business, (ii) choose a relevant measure of production or service activity for that type of business, and (iii) explain the relationship between the production (or service) output and each of the following: total fixed costs, fixed cost per unit, total variable costs, and variable cost per unit.

a. Steel company.

b. Hospital.

c. University.

d. Auto manufacturer.

Each team member should present his or her notes to the other teammates, who should confirm or correct the presentation. Then work together as a team to complete parts (3) through (6) below.

3. Using the examples of fixed and variable costs for steel companies from part (2a) above, explain the relationship between production output at a steel company and each of the following: total fixed costs, fixed cost per unit, total variable costs, variable cost per unit, total costs, and average unit cost.

4. With an X-axis (horizontal axis) of tonnes produced and a Y-axis (vertical axis) of total costs, graph total fixed costs, total variable costs, and total costs against tonnes produced.

5. With an X-axis of tonnes produced and a Y-axis of unit costs, graph fixed cost per unit, variable cost per unit, and total (or average) cost per unit against tonnes produced.

6. Explain how costs (total and per unit) behave with changes in demand once capacity has been set.