Fixed Vs. Variable Cost

There are two main types of costs, fixed costs and variable costs. Fixed costs stay the same regardless of the number of units sold. Variable costs increase or decrease due to the number of units sold. Fixed costs can be spread out though, through the number of units sold.

In this assignment the fixed cost is the building rent. The cost of the building rent is 9000. This cost is the same each year regardless of the units sold. The variable cost is the raw materials (cost for hamburgers). The variable cost is 650 based on 1000 units sold. The cost per unit is 9.65 for 1000 units sold.

Looking at table 1, we can see what happens to cost when we increase the units sold from 1000 to 6000 then to 8000 units sold. The total annual cost for 6000 units sold is 12900 and 14200 for 8000 units sold. The cost per unit sold at 6000 units sold is 2.15, while at 8000 units sold is 1.78 (rounded to the second decimal place). The variable cost per unit sold is .65, regardless of the number of units sold. The fixed cost per unit sold at 1000 units is 9.00, at 6000 units sold is 1.50, and 1.13 (rounded to the second decimal place) for 8000 units sold.

Table 1

Costs For Costs For Costs For

1000 Units 6000 Units 8000 Units

Sold Sold Sold

Total Variable 650 3900 5200

Costs

(Raw Materials)

Variable Cost 0.65 0.65 0.65

Per Unit

Total Fixed 9000 9000 9000

Costs

(Building Rent)

Fixed Cost 9 1.5 1.13