There are two general types of costs in business: fixed costs and variable costs
ID: 3353370 • Letter: T
Question
There are two general types of costs in business: fixed costs and variable costs. Fixed costs are expenses that do not change (in the short run) with changes in activity or production volume. Examples include rent, salaries, and utilities. Variable costs include materials and hourly wages. A simple model for the total cost of operations, as a function of quantity of product produced, is
T = F + VQ,
where F is fixed cost, V is variable cost, and Q is quantity produced.
Umbrella Corporation has the following cost equation for each month:
T = 7,712 + 2,935Q
This month, Umbrella sold 4.15 items. What percentage of total costs is made up by variable costs? Enter your answer as a percentage without the % sign.
Explanation / Answer
Variable cost = per unit cost X Quantity
= 2935 X 4.15= 12180.25
Total cost = variable + Fixed
= 12180.25 + 7712= 19892.25
%of variable to total cost = 12180.25/19892.25
=61.231%