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Fixed and Variable Costs of a Business

Assignment: Select a very simple business, one with a single product or one with approximately the same contribution margin percentage for all products.

Some possibilities are:

A child's lemonade stand
A retail video rental store
An espresso cart
A retail store selling compact disks
An athletic shoe store
A cookie stand in a mall
An attorney's office

Note: Do not select a business that has been used by another student. Read the discussion board entries before you select your businesses.

1. Make a list of all fixed costs associated with running the business you selected. Estimate the amount of each fixed cost per month (or per day or per year, if one of them is more appropriate for your business).

NOTE: You must first decide the cost per unit for the product or products you are going to make. You cannot "go backwards" and decide the total cost unless the cost you are analyzing is strictly fixed.

2. Make a list of all variable costs associated with making or obtaining the product or service your company is selling. Estimate the cost per unit for each variable cost.

3. Given the fixed and variable costs you have identified, compute the break-even point for your business in either units or dollars.

4. Assess the prospects of your business making a profit.

AND, be very careful when you identify variable costs. Remember that variable costs per unit are identified BEFORE production and/or capacity are known? That is, the variable costs stay constant regardless of the number of units produced.

Solution Preview

List of all fixed costs associated with running a Cookie Stand in a mall:

The fixed costs of the cookie stand are those costs that will remain the same irregardless of how many cookies are sold. The fixed costs for the Cookie Stand in a mall therefore would be as shown below:

Food permit - $100 per month
Business License - $200 per month
Rent - $500 per month
Utilities- $200 per month
Insurance - $150 per month
Sales and Marketing - $ 200 per month
Administrative salary - $1000 per month (Damrauer, 2010)

Therefore total fixed cost is equal to $2350 per month.

List of all variable costs associated with obtaining cookies to be sold
The variable costs of the cookie are those costs that vary with the amount of cookie that is to be sold. These variables costs are as shown below:

Supplies (cleaning supplies, Napkins & bags ...

Solution Summary

The solution discusses the fixed and variable costs of a business and computes the break-even point.