Cost can be classified into two categories, fixed and variable cost. 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 increase 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 cost?

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A variable cost is a cost whose total dollar amount varies in direct proportion to changes in the activity level. If the activity level doubles, the total dollar amount of the variable cost would double as well, if the activity level increases by 1%, the total dollar amount of the variable cost would also increase by 1%, and so on. A variable cost remains constant if expressed on a per unit basis. In short, the variable cost is constant per unit, but varies in total with the activity level.

A fixed cost remains constant in total dollar amount within ...

Solution Summary

The solution examines the difference between Fixed and Variable Costs followed by a detailed solution to the problem in 384 words in an attached Word document.

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