Question

Cost Behavior
Assume a local pizzeria reported the following results for June and July
	April	May
Unit Sales	2,000	3,000
Cost of Food Sold	$   8,000	$ 12,000
Wages and Salaries	3,700	4,000
Rent	2,000	2,000
Depreciation	500	500
Utilities	1,400	1,500
Supplies	200	300
Total	$ 15,800	$ 20,300
a. Identify each cost as being fixed, variable or mixed.
b. Determine the equation for total operating costs (Fixed + Unit Variable Cost * # of sandwiches)
c. Predict the total operating costs for			4000	pizzas
d. Determine the average costs for			4000	pizzas
Concept question: Why are fixed costs generally not relevant for decision-making?
Would average costs be useful for decision-making and why or why not?

Answer 1

Answer

	April	May	Difference	Change %	Type of Cost
Unit Sales	2,000	3,000	1,000	50%
Cost of Food Sold	$   8,000	12,000	4,000	50%	Variable
Wages and Salaries	3,700	4,000	300	8.11%	Mixed
Rent	2,000	2,000	-	-	Fixed
Depreciation	500	500	-	-	Fixed
Utilities	1,400	1,500	100	7.14%	Mixed
Supplies	200	300	100	50%	Variable
Total	15,800	20,300	4,500

I have calculated Difference and Change % as the difference will give us the Change and % change will tell us the Change in Production so if the Cost is Variable it will increase with same Percent and if there is no change in cost then it will be fixed cost and

If there is a increase but not the same percent as change in production then it means that the cost is mixed Cost.

Like in our question there is a increase of 50% in Unit sales, that means the variable cost should also increase by 50%, like in Supplies case, supplies is increasing by 50% same with change in sales, so it is a variable cost

And if there is not 50% increase then the cost is Mixed like Utilities is increasing by 7.14% not 50% so this is a fixed cost.

And if the cost is constant then it will be mixed like in Rent and Depreciation case, both are constant.

b.

Variable Cost = Total Difference / Change in sales

= $4,500 / 1000 Units

Variable Cost = $4.5 per unit

Fixed Cost = Total Cost – Variable cost

Let’s take example of 2,000 Units

Fixed Cost = $15,800 - $4.5 * 2,000 Units

Fixed Cost = $6,800

Y = $6,800 + $4.5x

Y = Total Cost

X = No. of Units

c.

Operating Cost for 4,000 Pizza = $6,800 + $4.5 * 4,000

Operating Cost for 4,000 Pizza = $24,800

d.

Average cost for 4,000 Pizza = Operating Cost for 4,000 Pizza / 4,000 Pizza

= $24,800 / 4,000 pizza

Average cost for 4,000 Pizza = $6.2 per pizza

e.

Fixed Cost is the cost which doesn’t gets affected by change in production or Change in sales, i.e. It remains same at all levels of production or sales.

So if we are trying to decide anything Fixed Cost doesn’t affect our Decision making process as Fixed Cost will be there and will be same, so if we produce 0 Units then also the Fixed Cost will be there and if we produce 1,000 Units then also the Fixed Cost will be there and same.

So Fixed Cost doesn’t affect our decision

f.

Yes we can say that Average Cost affect our decision as we know that the more units we produce the less will be the Average Cost as Fixed Cost is same and with increase in production, it is been divided between more units and thus leads to less per unit cost.

And if we want to decide something then the Per unit cost affects our decision.

Dear Student, if u have any doubt plz feel free to reach me.