'volume'?

Question

Hi,Please have a look at this: Your customer and your customer’s customer will be looking to see whether your prices reflex the lower costs of your inputs, but it isn’t that simple. The decline in your volume may mean that your fixed cost are now spread across lower volume and your cash flow from operation is going to be lower unless you can increase your price and sustain that increase.What do 'volume' and 'spread across lower volume' here mean?Many thanks,Nessie.

CalifJim · Accepted Answer

Suppose you are producing books for sale.

If you are selling a lot of books, you have high volume.
If you are selling very few books, you have low volume.

spread means distributed. It is related to the mathematical process of division.

A typical fixed cost is rent. Suppose you rent the factory space where you produce books, and the rent is $2000 a month.

If you have high volume, say 2000 books sold each month, then when you spread the $2000 cost across the 2000 books, you find that the amount of rental cost per book sold is $1. It takes $1 of rental cost to produce one book.

If your volume declines, say to 1000 books sold each month, then when you spread the $2000 cost across the 1000 books, you find that the amount of rental cost per book sold is $2. You may have to raise the price you charge the public for a book because it is costing you more per book to produce the books.

CJ

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