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In order to better understand fixed and variable costs I first need to understand what they
are. Variable costs are costs that vary directly in relation to the output of a product. Fixed
costs are unchanging expenses that do not vary according to the amount of business. They
may include rent and utilities. These two costs are an everyday item in any business.
Annual units sold: 1000
Item: Raw materials
Total Annual Cost: $650.00
Item: Building Rent
Total Annual Cost: $9000.00
The variable cost in the preceding example is raw materials. (Cost for hamburgers) This
cost will change based on the sales of the hamburgers and the price of the materials. The
fixed cost in the example would be building rent. This cost will remain the same regardless
of the sales of hamburgers or economy prices.
1. The cost per unit of raw materials (variable cost) is $0.65. 650/1000=.65
The cost per unit of rent (fixed cost) is $9.00. 9000/1000=9
2. The number of annual units sold has now increased to 6000.
The total annual cost is now $3900.00. 650*6=3900 or 0.65*6000=3900
The cost per unit of raw materials is $0.65. 3900/6000=.65 (remains unchanged)
The cost per unit of rent is $1.5. 9000/6000=1.5 (decreases)
3. The number of annual units sold has now increased to 8000.
The total annual cost is now $5200.00. 650*8=5200 or 0.65*8000=5200
The cost per unit of raw materials is $0.65. 5200/8000=.65 (remains unchanged)
