Question

Why can the distinction between fixed costs and variable costs be made in the short run?

List ten costs you have running a restaurant and classify the following as fixed or variable costs:

Answer 1

A total cost of a company is composed of its total fixed costs and its total variable costs. Fixed costs remain constant, no matter how much output a company produces; and variable costs vary with the amount produced. A distinction between fixed and variable costs is made in the short run production time period. The short run refers to a time frame where at least one factor of production is in fixed supply. There are certain costs that do not vary with total output; these are fixed costs that are based upon the size of the plant. In the short time, the size of the plant cannot be altered thus all costs that relate to the size of the plant continue to be incurred.

The ten costs incurred while running a restaurant and it's classification as fixed or variable costs are as follows:

-- Rent: Fixed cost

--Food/Beverages: Variable cost

-- Franchise fees: Fixed cost

-- Insurance: Fixed cost

--Advertising: Variable cost

-- Restaurant operator license: Fixed cost

--Restaurant supplies: Variable cost

-- Leasing of fixed assets (equipment): Fixed cost

--Depreciation: Fixed cost

-- Marketing Fees: Variable cost