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 th ...