Sat 21 Nov, 2015 02:13 pm
I'm trying to figure out the cost function for my start up to get an idea of how we should be pricing things. I'm having a specific issue (my micro is rusty).
When looking at fixed costs, it's often assumed the fixed costs are monthly recurring costs like rent, utilities, etc. etc. Many of the fixed costs we face are one-time development costs and are non recurring. I'm trying to figure out how to represent this in the same equation because normally it's assumed your fixed costs are recurring each month.
Let's say our monthly fixed costs are $4,500. We have one time costs of $25,000 right off the bat. Normally when I see cost functions the unit of time is not included, the fixed recurring costs are written as
TC= fixed costs+ per unit costs.
I'm tempted to simply add a time dimension to the equation, but am not sure if this really makes sense because I've had trouble finding this online.
TC= One time sunk cost+( monthly fixed*m) + per unit costs
TC= $25,000 +($4,500*m) + per unit costs
Can anyone think of obvious flaws to this approach?
Either treat your start-up costs as capital put into your business an depreciate it, or consider it a loan to your business and include an interest fee.
My micro is rusty, I'm still not sure how I would represent that in a cost function. We are paying all these up front cost out of pocket, so I would probably treat it as capital put into the business and depreciate it.
By the way, thank you very much for the prompt reply. Your answer was very helpful.