Question

Snowie™ is a brand of flavored shaved ice that is sold in snow cones at a variety of events and locations across the United States. Recently, a Snowie™ cart was spotted at the Kent Heritage Festival last summer. During this festival, street vendors offer a variety of foods and drinks.

At the Snowie™ cart, festival goers can purchase a 20-ounce snow cone for $4.00. For the purpose of this hypothetical example, let’s assume that the variable cost of each snow cone sold is $1.00.  Also assume that the monthly fixed costs for this Snowie™ snow cone cart total $1,500.

1. If the owner has to hire a worker to attend the kiosk, is the cost of the worker a variable or fixed cost with respect to the number of snow cones sold?  Discuss.

2. What other factors should once consider before deciding to start a Snowie business?  These factors could be internal or external influences that can affect the business.

Answer 1

Variable costs means those cost which are directly attributable with the level of production. The more number of units produced will result in increase in variable cost also and vice-versa. Fixed costs are those which do not change with level of production. These costs will be incurred even if no units are produced. 1) In the given case assuming the worker will be paid on hourly basis, the worker cost is a variable cost. More the number of hours he works, more he will earn, resulting in increase in workers cost. 2) There are many internal and external factors to be considered before stating a Snowie business. Internal Factors Easy availability of raw materials. Availability of trained workers. Maintaining the quality of flavored ice External Factors Availability of ready market for the product. Favorable climate conditions. Meeting the quality control norms of the industry.