Every resource needed for a decision option has an

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Every resource needed for a decision option has an opportunity cost It is defined by the next best use of that resource OC of a resource that has no other use is ZERO. OC of a resource that is constantly being replenished is its replacement cost. With stable prices, historical cost equals OC. How to measure Fixed vs variable costs : Fixed costs do not vary with volume of activity. A measure of the volume of activity depends on the decision context it can be # of units, #of customers, Labor hours, labor cost, # of miles etc as the case may be. Variable costs vary linearly with volume of activity. Linearity is a practical assumption. As you will see, firms typically “unitize” (spread) fixed costs. Fixed cost per unit of volume decreases as volume increases. Variable cost per unit of volume always stays constant assuming that variable costs are linear in activity volume
Fixed and variable costs are two ends of continuum. In an organization, costs can vary at different “levels.” Some costs can vary at a unit level, others at a “batch” level, yet other at a “product level.” We discussed several example in class. It is important to capture variability at

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