Question

Understanding the nature of fixed and variable costs is extremely important to managers. This knowledge its used in planning, making strategic and tactical decisions, evaluating performance, and controlling operations.

Required:

Form a team consisting of three persons. Each team member will be responsible for one of the following businesses:

a. Dental clinic

b. Fast-food restaurant

c. Auto repair shop

1. For 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.

2. Explain the relationship between the level of activity in each business and each of the following: total fixed costs, fixed cost per unit of activity, total variable costs, variable cost per unit of activity, total costs, and average total cost per unit of activity.

3.Discuss and refine your answers to each of the above questions with your group. For example, which of the above businesses seems to have the lowest ratio of variable to fixed costs? Which of the businesses' profits would be most sensitive to changes in demand for its services? Why?

I have to write a page answering questions 1-3 with examples about the Auto Repair Shop.

Answer 1

1)

AUTO REPAIR SHOP

Auto repair shop can consider number of repair as the activity base.the performance of the organisation and cost of organisation will have a direct link with the activity base.and this can be used for doing proper costing method.

FIXED AND VARIABLE COST

Fixed cost are the expenses that remain constant for a period of time irrespective of the level of output.

variable cost are expenses that change directly and proportionally to the change in business activity.

common fixed and variable cost of a auto repair shop is below.

Auto repair shop (fixed cost)=Workshop rent,managers and staff salaries,utilities

Auto repair shop(variable cost)=Electricity,wages,freight,purchase cost of repair equipment.

The activity base which we choose here is number of repair,whenever there is an increase/decrease of this activity.there will be a change in variable cost,if the auto repair shop has less repair work it means that,the electricity charges will be reduced,because they don't use high electricity equipment and this will eventually decrease the electricity bill.

freight charges is a variable cost and it will be also effected when there is a small changes in activity.here,we deal with auto repair shop,they might have to deliver the repaired vehicle to the customer.or they might need to freight inward from a different location.and slight change of the activity base will effect this.

They might also need many temporary expert assistance to check or review any particular repairs,and this also have a direct link with the base activity level.

2)

Different business uses different activity level,it mainly varies between the type of activity that the business is involved in.

a dental clinic might use number of appointments as the activity level,and a fast food restaurant might use number of customer as the activity level.even if they uses different activity level.still there are some common cost they all have .

Total fixed cost might be higher for a dental clinic and a auto repair shop comparing to fast food restaurant.

fixed cost per unit of activity keeps changing based on number of activity.increase in number of activity will lead to a less fixed cost per unit.

total variable cost must be changing for all of these business activity,it keeps increasing/decreasing based on the activity level of the business.variable cost per unit of activity will not change based on the level of output or activity.

3)

Dental clinic and auto repair shop might be having the lowest variable to fixed cost,because they are having more variable cost than fixed cost comparing to other business activity.business profit become sensitive when they have higher variable cost.in the case above auto repair shop and dental clinic is more sensitive to variable cost.which states that they are more sensitive to profits.

higher variable cost=higher sensitivity on profits.