Question

1. As production volume increases, describe how variable costs "behave”: (a) on a total basis and (b) on a per unit basis. Explain. (2pts each)
2. As production volume increases, describe how fixed costs "behave"”: (a) on a total basis and (b) on a per unit basis. Explain. (2pts each)
3. Lickety-Split makes pints of ice cream sold by major retailers. Identify each of the following costs as variable (V) or fixed (F), relative to the number of pints of ice cream produced. (1pt each)

a. Rent on the manufacturing facility

b. Ingredients in the ice cream

c. Depreciation on the factory equipment (using straight-line method)

d. Screws and other supplies used to maintain the factory equipment

e. Total wages paid to the manufacturing workers (not the rate per hour)

f. Annual business license to operate the company

g. Production manager’s annual salary

Answer 1

*Variable cost: Variable cost are those cost which is output dependent.

* Per unit: Variable cost per unit remains the same over the wide range of activities.

*In Total: Total variable cost proportionally varies to the activity level within the relevant range.

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*Fixed Cost: Fixed cost are those cost which is not output dependent.

* Per unit: Fixed cost per unit changes, it goes down as activity level goes up.

*In Total: Total fixed cost remains the same as the activity level within the relevant range.

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Sl.no	Particulars	Type of cost	Explanation
a.	Rent on the manufacturing facility	Fixed cost	Rent paid is fixed cost. Irrespective of production.
b.	Ingredients in the ice cream	Variable cost	It varies depends upon of production level.
c.	Depreciation on the factory equipment	Fixed cost	Depreciation expense is fixed cost. Irrespective of production.
d.	Screws and other supplies used to maintain	Fixed cost	The overheads costs that are constant when totalled.
e.	Total wages paid to manufacturing workers	Variable cost	It varies depends upon of production level.
f.	Annual business licence	Fixed cost	Licence expense is fixed cost. Irrespective of production. (One-time payment)
g.	Production managers annual salary	Fixed cost	The annual payment is fixed cost. Irrespective of production.

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