Fixed And Variable Cost
In a 2 page paper, please complete the following:
- Review the financial statements from Apple Inc…
- Identify fixed and variable cost and tell if there was an increase in variable and fixed cost then
- Discuss the fixed and variable costs used by your chosen company (4-5 each).
To review, a variable cost is a cost that is subject to change based on the level of activities performed. A fixed cost is a cost that is not dependent on the level of revenue or production (e.g., depreciation, insurance, rent expense). Cost drivers measure an activity level. If cost driver amounts increase, variable costs will also increase. Conversely, fixed costs are not affected by increases in cost driver amounts.
Effects of Fixed and Variable Costs
To demonstrate the effects of fixed and variable costs, let’s assume the following scenario: Lakeside Company produces surfboards. The materials for one surfboard costs $25. Lakeside Company leases store space for $750 per month. Below are the effects of fixed and variables costs per month. Let’s assume that Lakeside Company produces 50 surfboards per month. We will also consider the cost scenario for 100 surfboards produced each month.
Production cost comparison – 50 Surfboards
|50 Surfboards||Total Costs Per Month||Average Cost/ 50 Surfboards|
|Surfboard production materials||$1,250||$1250|
Production cost comparison – 100 Surfboards
|100 Surfboards = Increase in Production||Total Costs Per Month||Average Cost/ 100 Surfboards|
|Surfboard production materials||$2500||$2500|
|Because of the increase in production, you will notice that variable costs increase to $2,500 for 100 surfboards. However, the fixed cost (rent) decreases because the rent amount is applied to 100 surfboards rather than 50. This causes the fixed cost or rent to decrease for the average cost of each surfboard.|