Question

Suppose a pizza parlor has the following production costs: $4.00 in labor per pizza, $2.00 in ingredients per pizza, s0.70 in electricity per pizza, $2,500 in restauran rent per month, and $450 in insurance per month. Assume the pizza parlor produces 2,000 pizzas per month What is the variable cost of production (per month)? The variable cost of production is Enter your response as an integer.)

Answer 1

'Variable cost of production' are the production costs which varies as per the changes in output.If the output is high the variable costs would also be high and vice versa.Its examples are daily labour charges,cost of raw materials and electricity.Rent and insurance costs are included in fixed costs as they are independent of the level of output.They would be fixed irrespective of production process.

Here the variable costs per month would be the sum of the costs of the variable inputs multiplied by the number of pizzas being produced per month.Here the variable costs are the cost related to usage of labour,ingredients and electricity per Pizza.This can be depicted as follows-

Total variable cost per month=2000×($4.00+$2.00+$0.70)=2000×$6.70=$13,400.