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?
Fixed costs are those costs which would not change with change in activity level (number of hamburgers). Variable costs are those costs which are constant on per unit basis and change in proportion to the change in activity level.
We are given two costs - Raw Materials and Building Rent
Raw Materials would be a variable cost since the cost will each with each hamburger. Each hamburger would need raw materials and so as we produce more hamburgers, more raw materials would be needed and so the cost would change ...
The solution explains a question relating to fixed and variable costs