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 the questions below with examples with numbers included. thank you

Answer 1

Fixed cost = It is the cost which doesn’t change with the change the units produced or services provided. The example of such cost for the fast food industry includes rent, insurance, utilities, salary, etc.

Variable cost = It is the cost which change with change in the units manufactured or services provided. The example of such cost for the fast food industry includes raw material i.e. vegetables, oil, consumables, etc.

Per unit fixed cost = Fixed cost/No. of units

It changes with change in the units manufactured or services provided.

Per unit variable cost = Variable cost/No. of units

When the variable cost is computed on per unit basis, then it remains constant.

Total cost = Variable cost + Fixed cost

Average per unit total cost = Total cost/No. of units

All such costs are related to each other and compute based on two component of costs i.e. variable and fixed cost. Total cost remains same at initial level when production or services not started and when service business is started or manufacturing started then total cost starts changing as the variable cost change.

The fast food business will have greatest variable to fixed cost ratio because the raw material is a variable cost i.e. used to prepare fast food. The profit margin of the restaurant is least sensitive because the menu price of the food items doesn’t change always when the cost of food changes. The contribution margin in this business sector is also low because this business is a service sector business and thus require low fixed cost and high variable cost.

Contribution margin = Sales – Variable cost