# Fixed Costs and Variable Costs

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? PLEASE USE THE FORMAT BELOW TO ANSWER...

(1) Identify which cost item below is fixed and variable and why?

Raw materials:

Building rent:

(2) What is the cost for 1,000 units?

The variable cost per unit is:

The total variable cost is:

The fixed cost per unit is:

The total fixed cost is:

The total cost for 1,000 units is:

The total cost per unit is:

(3) What is the cost for 6,000 units?

The variable cost per unit is:

The total variable cost is:

The fixed cost per unit is:

The total fixed cost is:

The total cost for 6,000 units is:

The total cost per unit is:

(4) What is the cost for 8,000 units?

The variable cost per unit is:

The total variable cost is:

The fixed cost per unit is:

The total fixed cost is:

The total cost for 8,000 units is:

The total cost per unit is:

#### Solution Preview

... a fixed cost because it does not change with increases in the volume of activity.

(2) What is the cost for 1,000 units?

The variable cost per unit is: \$650 / 1000 = \$0.65

The total variable cost is: \$0.65 * 1000 = \$650

The fixed cost per unit is: \$9000

The total fixed cost is: \$9000

The total cost for 1,000 units is: \$9000 + \$650 = \$9650

The total cost per ...