Understanding Fixed and Variable Costs

What is a fixed cost?

• A cost that increases with sales

• A cost that changes every week

• A cost that stays the same regardless of production

• A cost only paid once a year

What is a variable cost?

• A cost that increases as production increases

• A cost that remains unchanged

• A tax paid once a year

• A cost paid before opening a business

Which of the following is most likely a fixed cost?

• Wood for each table built

• Monthly rent for a workshop

• Glue per desk

• Electricity used per item

Which of the following is a variable cost?

• Paint used to decorate each piece of furniture

• Office internet

• Machinery rental

• Accountant salary

If a business produces zero units, which cost will still exist?

• Packaging

• Materials

• Rent

• Paint per product

Why is it important to understand fixed and variable costs?

• To pay taxes

• To price products correctly and manage profits

• To impress customers

• To create logos and branding

In which scenario will variable costs increase?

• When you buy a new printer

• When you double production of your product

• When you switch internet providers

• When rent goes down

A company pays $1,000 per month for rent and $2 per product in materials. If they make 500 products, how much is their total cost?

• $1,000

• $1,500

• $2,000

• $2,500

Which cost is easier to predict and control?

• Fixed costs

• Variable costs

• Taxes

• Employee tips

You’re opening a small workshop. Which of these should you plan as a variable cost?

• Monthly software subscription

• Screws and nails for furniture

• Storage unit rental

• Phone plan