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Variable costs are expenses that change in direct proportion to the activity of a business
while the per-unit cost remains constant. For example, cost of goods sold, sales
commissions, shipping charges, delivery charges. Fixed costs are expenses whose total
does not change in proportion to the activity of a business. For example, a retailer must
pay rent and utility bills irrespective of sales volumes.
For this example, we will be running a restaurant and analyze the fixed and variable costs
associated with changes in sales. We will determine the cost per unit when sales are 1000
units, 6000 units and 8000 units respectively. The initial data given is:
Item: Raw Materials (cost for hamburgers)
Total Annual Cost: $650
Item: Building Rent
Total Annual Cost: $9000
The table below shows the cost per unit for each sale point (yellow highlights show
amounts that were solved for):
Sales Volume Total variable (hamburgers) Variable
per-unit Total fixed (Rent) Fixed
per-unit
1000 $ 650.00 $ 0.65 $ 9,000.00 $ 9.00
6000 $ 3,900.00 $ 0.65 $ 9,000.00 $ 1.50
8000 $ 5,200.00 $ 0.65 $ 9,000.00 $ 1.13
The variable expense per unit would be figured by dividing the total variable expense by
the number produced. In this example, $650 / 1000 yields a per-unit cost of $0.65.
Therefore, in order to pay for the raw materials, each of the 1000 hamburgers would need
to be sold for at least $0.65. In the same light, in order to pay the rent for the building
(fixed cost) each of the 1000 hamburgers would need to be factored in to the cost of rent:
