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    Managerial Accounting

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    Details: 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 Preview

    Raw Materials cost is a variable cost while the building rent is a fixed cost. This is primarily because the raw material cost will increase if you sell more or less. On the other hand, the building rent will not increase/decrease with the change in the sales quantity. It is "Fixed" ...

    Solution Summary

    The solution explains the concepts very well using the example in the question. All the steps are clearly explained and outlined. The answer is very easy to understand and can be followed along with anyone who has a basic understanding of the subject. Overall, an excellent response to the question.