Fixed costs may include insurance, labor, rent, heat, telephone,
taxes and advertising. Fixed costs remain unchanged, no matter how
much business is done.
Variable costs may include labor, electricity, gasoline and repairs.
The longer you operate machinery, the more fuel or electricity it
needs and the faster it wears out. Variable costs rise and fall as
business increases or decreases.
$1,200 / 60,000 lbs. = 2 cents/lb
5 cents/lb. - 2 cents/lb. = 3 cents/lb
$1,200 / 120,000/lb. = 1 cent/lb
5 cents/lb. - 1 cent/lb. = 4 cents/lb
Doubling the number of pounds of cans processed has cut in half
the fixed cost per pound, resulting in an increase in the amount of
money available for variable cost and profit.
Suppose variable costs added another 2 cents per pound of expenses.
Profit would be 1 cent per pound if 60,000 pounds were processed, 2
cents per pound if 120,000 pounds were processed.