Accounting Fixed and Variable Costs

Fixed and Variable Costs

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?

In this scenario the fixed cost is the building rent. This is a constant expense that will not change. Whether we produce one hamburger or 1000 hamburgers, the cost of building rent will stay the same. The variable cost is the cost of raw materials used for making hamburgers. Variable costs will increase as production increases, but the cost per unit will remain the same as long as the cost of the raw materials does not change.

If we currently produce 1000 hamburgers at an annual cost of $650.00, the cost per unit is 65 cents per unit. The cost for building rent/1000 units is $9.00 per unit. This means that it cost $9.65 per unit to make each hamburger.

If we increase production to 6000 units, the variable cost per unit will remain the same, but the variable cost will increase overall. If the variable cost per unit is 65 cents, the total annual cost will increase to $ 3,900.00 (.65 x 6000) annually. The cost of the fixed cost will not change. The total cost to produce 6000 units