Answers to Learn As You Practice – Problem 2.

Charlie’s Burgers sells hamburgers, fries, and drinks to the lunch crowd. In the normal course of business, costs are incurred for the following items. Determine if the costs are fixed (F), variable (V) or mixed (M).

V 1. Meat
V 2. Cashier’s wages
F 3. Cleaning crew wages
F 4. Depreciation on cooking equipment
V 5. Paper supplies, napkins, bags, straws
F 6. Rent
F 7. Advertisement run every Friday
V 8. Cooks wages
M/V 9. Utilities
F 10. Depreciation on the freezer
F 11. Cleaning supplies, soap, etc.
V 12. Lettuce, ketchup, mustard, pickles, etc.
V 13. Buns
V 14. Bacon for bacon cheeseburgers
F 15. General liability insurance

For all variable costs noted above, more is spent for each hamburger made and
sold. Material that is part of the product and labor to make/sell the product is
always variable.

The fixed costs will not change because one more or one less hamburger is
made or sold.

2. and 8. could also be mixed. The company could have to have a certain
number of hours worked no matter what sales are and then add to the number
of hours worked if sales are higher.

After you have classified the costs as fixed, variable, or mixed, determine which fixed costs are discretionary and which ones are committed. Determine if there are any sunk costs. (Variable costs are neither discretionary, committed, or sunk since you incur them every time you do something one more time.)

Discretionary fixed costs - 7 you can decide not to run the advertisement
3 & 11 you can decide to spend less and clean less often

Committed fixed costs - 6, 15 these costs have to be spent to run the
business and management can not decide not to spend.

Sunk Costs - 4, 10 depreciation is always a sunk cost. The money
has already been spent. Depreciation is always a committed cost.