Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Fixed and Variable Costs
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?
In this scenario the fixed cost is the building rent. This is a constant expense that will not
change. Whether we produce one hamburger or 1000 hamburgers, the cost of building rent
will stay the same. The variable cost is the cost of raw materials used for making
hamburgers. Variable costs will increase as production increases, but the cost per unit will
remain the same as long as the cost of the raw materials does not change.
If we currently produce 1000 hamburgers at an annual cost of $650.00, the cost per unit is
65 cents per unit. The cost for building rent/1000 units is $9.00 per unit. This means that it
cost $9.65 per unit to make each hamburger.
If we increase production to 6000 units, the variable cost per unit will remain the same, but
the variable cost will increase overall. If the variable cost per unit is 65 cents, the total
annual cost will increase to $ 3,900.00 (.65 x 6000) annually. The cost of the fixed cost
