Exercises 3.
Matching
Reflect on your understanding of different types of costs by identifying each of the following
items as a: fixed cost or variable cost
Advertising costs
Capital equipment
Furniture, e.g. office tables and chairs
Ingredients
Office supplies
Packaging (food wrapping)
Rent (of commercial premises)
Salaries for managers
Utility bills (gas, water and electricity)
Wages for employees
T or F.
1.Total revenue for the sales of a product is calculated by multiplying the number of units sold by
the selling price.
2.To calculate total costs of output, both total fixed costs and total variable costs are added
together.
3.The level of profit or loss of a business can be calculated by using deducting the total cash
outflows from the total cash inflows.
4.Indirect costs refer to the costs that are clearly identified with the production of a specific good
or service.
5.Fixed costs do not change due to changes in the level of output.
6.Costs that change in proportion to the amount of output produced are known as indirect costs.
7.The available revenue for a business comes from money generated from the sale of goods and
services and non-trading revenue.
8.Costs that are directly incurred in the production process are known as indirect costs.
9.The cost of wages for factory workers and the raw materials costs of production are classified
as fixed costs.
10.Above the line marketing by placing advertisements in local and national newspapers would
be an example of variable costs.
11.The purchase of fabrics would be classified as a fixed cost of production for a textiles
manufacturer.
12.A firm has fixed costs of $9,000, output of 1,000 units, and variable cost per unit of $5. The
total costs of output are then equal to $15,000.
13.Rent, salaries, and marketing costs are all examples of fixed costs.
14.The cost of raw materials is an example of variable costs of production for a manufacturing
firm.
15.The cost of meals and drinks on board a commercial flight are classified as a direct cost for an
airline company.
16.The salaries of senior executives are classified as a fixed cost.
17.The sale of debentures and the interest received from deposits at a bank can be classified as
sources of non-sales revenues.
18.Telephone charges for a clothes retailer can be classified as a variable cost.
19.Security, professional accountancy fees, and rent of a production facility are all be classified
as fixed costs for a car manufacturer.
20.Packaging costs can be classified as a fixed cost of production.
Multiple Choices
1.The difference between sales revenue and a company’s total costs is known as _______
2. Given the data for a widget manufacturing company:
Direct materials per unit $40
Electricity per unit $10
Factory rent $300,000
Selling price of a widget $75
Total capacity of the factory 45 000 units
What is the expected level of profit if the company is functioning at full capacity?
A. $925 000
B. $825 000
C. $1 000 000
D. $1 275 000
3. Patricia’s van rental business has monthly fixed costs of £1000. She rents each van for £50 per
day and the variable cost for each van rented is £10. She is aiming to make a profit of £2000.
Therefore, the target profit output for Patricia’s van rental business is_______van rentals per
month.
4. Anna’s stall sells smoothies at £4 per drink and the combined cost of ingredients and
packaging is £1. She sells 150 smoothies. Therefore, Anna’s total contribution is £______
5. Which of the following is considered to be a fixed cost?
A. Sales commission
B. Materials
C. Staff salaries
D. Packaging
Case Studies
Case Study 1.
Pawlyn Drones is a newly established manufacturer of drones for recreational use. The firm
produced 180 drones last month, and sold these for an average price of $230. Pawlyn Drones had
average variable costs of $190 per drone. Its fixed costs per month are $4,500.
(a) Define the term fixed costs. [2 marks]
(b) Calculate the average fixed cost (AFC) for Pawlyn Drones. [2 marks]
(c) Calculate the monthly profit or loss made by Pawlyn Drones [2 marks]
Case Study 2.
Tokyo Ceramics sells handcrafted cups for $10. The firm's average variable cost is $4 for each
cup, and sells 1,200 of these cups per year. The firm has fixed costs of $3,000 per year.
(a) Calculate the annual sales revenue for Tokyo Ceramics.
(b) Calculate the profit margin (mark-up) on each cup sold by Tokyo Ceramics.
(c) Calculate Tokyo Ceramics' overall profit earned on the sale of these cups.
Case Study 3.
The table below refers to the costs and revenues of YTF Toys Ltd. when operating at 4,000 units
of output per month:
Item Costs & Revenues ($)
Price $20
Raw materials per unit $8
Rent $7,000
Salaries $8,000
(a) Calculate the total cost for YTF Toys Ltd. of producing 4,000 units.
(b) Calculate the profit earned by YTF Toys Ltd. if it is able to sell all of its output this month.
Case Study 4.
Camiko Facemasks Company (CFMC) has fixed costs of $2,000 and sells 250 units of output per
month. Each item costs $15 to make and sells for $25.
(a) Calculate the total costs per month for CFMC. [2 marks]
(b) Calculate the monthly profit for CFMC. [2 marks]
Calculate the change in the average cost of production for CFMC at 150 units and 300
(c)
units of output, and comment on why the unit cost has changed. [4 marks]
Case Study 5.
Connie's Candles (CC) manufactures its own candles and sells these to retail outlets. The firm has
fixed costs of $4,000 each month, which includes rent and management salaries. Its average
variable costs are $3 per candle. The firm’s current level of demand is 2,500 candles per month.
The average price of its candles is $6.
[2
(a) Using a relevant example, explain what is meant by a variable cost.
marks]
[2
(b) Calculate the firm’s average total costs (ATC) for the month.
marks]
[2
(c) Calculate the monthly total costs of production for Connie's Candles.
marks]
Calculate the profit if demand for the firm's candles increases to 3,000 units per month. [2
(d)
marks]
Case Study 6.
Snippets Hair Salon Co. has annual fixed costs of $1.2 million. The company has an annual
output of 150,000 customers, with a variable cost per customer of $15. Calculate the total annual
costs for Snippets Hair Salon Co. [2 marks]
Case Study 7.
Thompsons Farms has annual fixed costs of $2 million. It has an annual output of 1,250,000
units, with variable cost per unit of $2. Calculate the total annual costs for Thompsons Farms. [2
marks]
Case Study 8.
MisTech Limited is a large manufacturer with monthly fixed costs of $1 million. It has an annual
output of 150,000 units. The variable cost per unit is $150. Calculate the total annual cost for
MisTech Limited. [2 marks]
Case Study 9.
Gardeners’ Pots has total costs of $2,000 and fixed costs of $1,100 for an output level of 600
units. Calculate the variable cost per unit for the firm. [2 marks]
Case Study 10.
Below is a partly completed table of the fixed, variable and total costs of the Casual T-shirt
Company at different quantities/output per month.
Fixed costs Variable costs ($) Total costs
Output (T-shirts) ($) ($9 per T-shirt) ($)
500 5000
1000 9000
1500
2000 23 000
Complete the table, using the figures provided to work out the missing costs.
Use the data in your completed table to draw a graph showing the relationships between
the quantity/output of T-shirts and the fixed, variable and total costs of production.
Case Study 11.
As a result of the COVID-19 pandemic, remote working has brought benefits to some employees,
such as better work–life balance and a reduction in commuting time.
Companies have also benefited from remote working. Some have been able to reduce fixed costs,
such as the renting of office space or the provision of coffees and snacks for employees. Others,
such as Facebook/Meta and Stripe, have been able to cut costs by offering employees the ability
to work remotely and thus relocate to less expensive areas, in exchange for a cut in pay.
Finally, some businesses have been able to hire workers from different regions. This wider labor
supply can lead to lower costs for labor, both from salary payments and social security taxes.
1. Define fixed costs. [2 marks]
2. Explain how remote working can reduce fixed costs. [2 marks]
Case Study 12.
Case Study 13.
