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Calculating variable and fixed costs for selling hamburgers

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Costs can be classified into two categories, fixed and variable costs. These costs behave differently based on the level of sales volumes. Suppose we are running a restaurant and have identified certain costs along with the number of annual units sold of 1000.

Item: Raw Materials (cost for hamburgers)
Total Annual Cost: 650
Item: Building Rent
Total Annual Cost: 9000

Identify which cost item above is fixed and variable and why? What is the cost per unit of each? Suppose we increased our sales volume to 6000 units and then to 8000 units the following year (and are still within the relevant range), what would be the total annual cost and unit cost of fixed and variable costs?

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Solution Summary

The solution involves several calculations to determine the optimum volume for the sale of hamburgers to pay fixed costs of operation. Variable costs are figured at three levels of production and fixed costs are applied on a unit cost basis for each scenario.

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Raw materials are variable costs for two reasons: they are consumed as part of the product sold, and the amount purchased will vary with the amount of hamburgers sold. If $650 is the total raw materials and if sales are 1000 units, then the cost per unit is 650 / 1000 = $.65.

Building rent is a ...

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