A mixed cost is one that has a fixed and a variable component, that is, it cannot be definitively eliminated and, at the same time, it increases or decreases as the company’s production level increases or falls, respectively.
To understand it in another way, the mixed cost is one that has an invariable part and another that can rise or fall depending on the sales or production achieved.
At this point, we must first recall the concept of variable cost. This is the one that fluctuates according to the volume of business. That is, if there is no economic activity, there is no variable cost.
An example of variable cost can be the amount of raw material that a factory requires as an input to produce its merchandise. The higher the demand from your customers and the more units you have to produce, the more raw material you have to buy.
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Instead, a cost or fixed cost is inescapable. This means that it is independent of the level of production. Whether the firm produces 100 or 0 units, it still has to incur the fixed cost.
An example of a fixed cost can be the rent that the company pays monthly for the office or premises that it uses for its activity.
Likewise, we must define what cost means. This is, very briefly, the consumption of factors of production for the development of a good or a service.
Characteristics of a mixed cost
We can summarize the following characteristics of a mixed cost:
- It has a fixed component and a variable component.
- Some of that cost is unavoidable.
- Another part of the mixed cost varies according to the volume of activity of the company.
- It can also be called semi-variable cost.
- It can not only apply to the costs of a company, but to those of a person. For example, a mobile phone plan may have a fixed rate and a variable rate. Thus, it may be that the user has a number of minutes that he can consume. However, if he exceeds them, he will have to pay an additional fee for the excess. The latter would be the variable component.
The clearest example of mixed cost is perhaps that of a salesperson who has a base salary. However, he also receives a commission for every sale he makes.
That is, in this case, for the company, the employee’s compensation is a mixed cost because there is a fixed part (the base salary that must be paid) and another variable component (which will depend on the efficiency of the seller).