Question
In: Accounting
Describe the principal costs incurred in the business that employs you today, or a prior business,...
Describe the principal costs incurred in the business that employs you today, or a prior business, and then categorize them as fixed, variable, or mixed costs. If the volume of activity increased 10%, what would happen, in general terms, to unit costs for that product or service? 100 words or more
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Expert Solution
Solution
Various principal cost in plastic coated notebook manufacturing business are Rent of premises, salary of employees, Rent of machine, electricity charges, selling distribution & administration expenses, Direct material, Direct wages etc.
Assuming 10,000 unit of Coated notebook are produced in a year.
| Cost | Type of Cost | Cost per unit | Total cost $ |
| Rent of premises | Fixed Cost | 3 $ | 30000 |
| Rent of Machine | Mixed Cost (1000 $ fixed per annum) | .60 $ | 6000 |
| Salary of employees | Fixed Cost | 6 $ | 60000 |
| Direct Material | Variable Cost | 3 $ | 30000 |
| Electricity Charges | Mixed Cost (500 $ Fixed Anuually) | .95 $ | 9500 |
| Direct wages | Variable Cost | 1.5 $ | 15000 |
| Selling & Office expense | Variable Cost | 1.5 $ | 15000 |
| Total | 16.55 |
Total cost per unit = 16.55 $ per unit
In case if we increase the volume of activity by 10 % i.e. total production annually will be 10000+1000 = 11000 Units
| Variable cost / unit | 6 $ |
| Fixed Cost / unit | 8.18 $ |
| Mixed Cost / Unit | 1.54 $ |
Total Cost per unit = 15.72 $
Learning
1. Variable cost per unit does not changes with the change in level of activity in this case variable remain same at 6 $ per unit.
2. Fixed Cost per unit reduces as we increase the level of output/ activity in this case fixed cost has reduced from 9 $ to 8.18 $.
3. Mixed cost has both the component fixed as well as variable.
Therefore in general terms the cost of the product reduces when the level of output is increased.
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