Question

What is causing this increase in the fixed costs in total but not an increase in the variable costs per unit?

	Present 500 Karaoke Mic			Expected 750 Karaoke Mic
	TOTAL	UNIT	TOTAL	UNIT		DIFFERENCE
Sales	$ 175,000	$350	$ 247,500	$330		72,500
Variable Cost	100,000	200	150,000	200		50,000
Contribution Margin	75,000	$150	97,500	$130		22,500
Fixed Cost	45,000		55,000*			10,000
Net Operating	30,000		42,500			12,500

Answer 1

Meaning of variable cost:

Variable costs are expenses that vary in proportion to the volume of goods or services that a business produces. In other words, they are costs that vary depending on the volume of activity. These costs increase as the volume of activities increases and decrease as the volume of activities decreases.

For example,

• Direct materials
• Direct labor
• Transaction fees
• Commissions
• Utility costs
• Billable labor

Unlike fixed costs, which remain constant regardless of output, variable costs are a direct function of production volume, rising whenever production expands and falling whenever it contracts.

Hence , when sales increase then variable cost in the same ratioand variable cost per unit will constant .

In the given case ,when the sales unit expected to increse from 500 units to 750 unit then variable cost per unit will remain same .

Meaning of fixed cost :

A fixed cost is a cost that does not change with an increase or decrease in the amount of goods or services produced or sold. Fixed costs are expenses that have to be paid by a company, independent of any specific business activities.Fixed costs are usually established by contract agreements or schedules. These are base costs involved in operating a business comprehensively. Once established, fixed costs do not change over the life of an agreement or cost schedule.

For example.

Depreciation

rent

insurance

interest expenses

saleries etc,

However , sometimesthe fixed cost will be increase like interest ,rent insurance. When the sales amount increase the company need to increse the space to maintain inventory then rent cost will increase.