Question

Understanding the nature of fixed and variable costs is extremely important to managers. This knowledge is used in planning, making strategic and tactical decisions, evaluating performance, and controlling operations. Each group member is responsible for one of the following businesses. Retail store that sells music CDs Dental clinic Fast-food restaurant Auto repair shop Required In each business decide what single measure best reflects the overall level of activity in the business and give examples of costs that are fixed and variable with respect to small changes in the measure of activity you have chosen Explain the relationship between the level of activity in each business and each of the following total fixed costs per unit of activity, total variable costs, variable cost per unit of activity, total costs, and average total cost per unit of activity. Discuss and refine your answers to each of the above questions with your group. Which of the above business seems to have the highest ratio of variable to fixed costs? The lowest? Which of the businesses’ profits would be most sensitive to changes in demand for its services? The least sensitive? Why?

I need to write a page about fast food restaurant. can anyone help me with questions 1-3 with examples please.

Answer 1

Fast food restaurant -

Fixed Cost - This cost remains constant in nature. it wont increase or decrease based on production. Fixed expense for Fast food restaurant will be Rent,staff salary, utilities, insurance etc.

Variable Cost - This will be directly proportionate to production for fast food restaurant it  will be consumables bought to make food like Vegetables, meat, oil, consumables etc.

Fixed costs per unit - Total fixed cost / No of units produced. Fixed cost per unit will be increase/decrease based on no of units produced.

Variable cost per unit - Variable costs vary in a linear fashion with the production level. However, when stated on a per unit basis, variable costs remain constant across all production levels within the relevant range

Total cost- it means total cost Fixed cost + Variable cost.

Average total cost per unit refers Total cost / No of units produced((Total fixed cost + Total variable cost)/No of units produced)

Fast Food restaurant will have highest ratio of variable cost due to material used to prepare food.

its least sensitive to change in business profits by increase in demand in service while comparing to other business being per unit profit after adjusting variable cost is less in this business.

Contribution margin(sales minus variable product costs) is less for restaurant business because of high variable cost.