Management Accounting

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Costs can be classified into two categories, fixed and variable costs. Since these cost behave differently based on the level of sales volumes, suppose we identify certs costs along with number of annual units sold of 100 if we owned a restaurant.

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? If the sales volume is increased 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? Please detailed calculation for each requirement.
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Solution Preview

Hi there,

Your problem is a bit difficult to decipher, but if I am reading it correctly, I see the following:

Annual rent for the building is 9,000. This amount is fixed regardless of how many hamburgers the company sells. If your annual cost is 650 for every 100 units sold, then you have a per unit cost of 6.50. If sales volume increases to 6,000, then total costs are 6,000 X 6.50 = 39,000. In the following year, if sales volume increases to 8,000, then total costs are 8,000 X 6.50 = 52,000. The fixed unit cost in the first year would be 9,000 / 6,000 = 1.50 , and in the following year, the fixed unit cost would be 9,000 / 8,000 = 1.125.

Here is some additional information for you regarding fixed vs. variable costs:

Variable costs or direct costs are expenses that change in direct …