Chapter 2, Variable & Fixed Costs (Deck 2.5)

Question 1

What do Variable Costs mean?

What are the 2 sections we split Variable Costs into?

Answer 1

Variable Costs mean that the Total Cost changes with more or less production.

Question 2

What are the 2 sections we split both Variable and Fixed Costs into?

Answer 2

The 2 sections we split Variable Costs into are: Total Dollars and Cost Per Unit.

Question 3

What does Total Dollars mean in relation to Variable Costs?

Answer 3

Total Dollars is the Total amount spent on a certain activity.

Question 4

What does Cost Per Unit mean in relation to Variable Costs?

Answer 4

Cost Per Unit is the Total Dollars Divided by the Units I Produce.

Cost Per Unit = (Total $ / Units Produced)

Question 5

Give an example of Variable Costs in Relation to Total Costs, in the scenario of Starbucks and Coffee Beans.

Answer 5

Example of Variable Cost in Relation to Coffee Beans: The more cups of coffee I produce at Starbucks, the more coffee beans I have to purchase.

Question 6

Practice: Cost Per Unit within Variable Costs

What is the Cost Per Unit if Starbucks has to purchase $100 of coffee beans to make 100 cups of coffee?

When will the Cost Per Unit stay the Same?

Answer 6

The Cost Per Unit would be $1.

= $100/100 cups
= $1 per cup

The Cost Per Unit will stay the same as long as it is a Variable Cost.
= $200/200 cups
= $1 per cup

Question 7

What is a Fixed Cost?

Give Example in the Scenario of Starbuck’s Espresso Machine.

Answer 7

A Fixed Cost is when Total Costs do NOT change with more or less production, within relevant range.

Example in Starbucks Scenario: Starbies is renting an espresso machine for a flat rate of $200 per month. It will be $200 for the rental no matter what.

Question 8

When will Cost Per Unit change?

Answer 8

Cost Per Unit will change when it is a Fixed Cost.

Question 9

Give Example of Cost Per Unit in the Scenario of Starbuck’s Espresso Machine.

Answer 9

The Cost Per Unit changes depending on how many cups they make.

$200 rental / 1 Cup a Month = $200 to make coffee that month.

$200 rental / 100 Cups a Month = $1 to make coffees that month.