Problem:
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?
A good approach to this individual assignment is the following in the standard report format of:
1. A cover page with your name on it.
2. An Introduction section stating what your report is going to do.
3. An Analysis section of the two types of costs and which you think is fixed and which is variable and why.
4. Show your two sets of calculations for sales at both 6,000 and 8,000 units.
5. A summary table showing totals costs for each sales level 1,000, 6,000 and 8,000 and a written conclusion.