Fixed 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?

Instructions for Unit One: Individual Project and questions

Please note the following:
1. Note the points assigned for each requirement of the individual project
2. Do not attempt to solve the individual project as an essay
3. Show your detailed calculations for each requirement of the individual project
4. Number your solution for each requirement of the individual project as shown below

Note : Please see attachment for Identify Variable & Fixed

Grading guideline for Unit 1

Requirement Points Points Points Total
Identify Variable & Fixed (4) 4 4
Units 1000 6000 8000
Total Cost (2 each) 2 2 2 6
Total Cost per unit (2 each) 2 2 2 6
Variable cost per unit (7) each 7 7 7 21
Total Variable cost (7) each 7 7 7 21
Total Fixed Cost (7) each 7 7 7 21
Fixed cost per unit (7) each 7 7 7 21
Discretionary Points 0
Total Grade 100

(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:

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Solution Preview

...e is rent. You have to pay the same rent regardless of the number of burgers sold.

If there are 1,000 units sold, then divide each cost by 1,000.
Variable Cost (Hamburgers) - $650 / 1,000 units = $0.65 / unit
Fixed Cost (Rent) - $9000 / 1,000 units - $9 / unit
Total Cost / Unit - ($650 + $9000) / 1000 = $9.65 / unit

If the sales volume increases to 6,000 units, ...