Understanding the nature of fixed and variable costs is extremely important to managers. This knowledge is used in planning, making strategic and tactical decisions, evaluating performance, and controlling operations.
Required:
Form a team consisting of three persons. Each team member will be responsible for one of the following businesses:
a. Dental clinic
b. Fast-food restaurant
c. Auto repair shop
1. For each business, decide what single measure best reflects the overall level of activity in the business and give examples of costs that are fixed and variable with respect to small changes in the measure of activity you have chosen.
2. Explain the relationship between the level of activity in each business and each of the following: total fixed costs, fixed cost per unit of activity, total variable costs, variable cost per unit of activity, total costs, and average total cost per unit of activity.
3. Discuss and refine your answers to each of the above questions with your group. For example, which of the above businesses seems to have the lowest ratio of variable to fixed costs? Which of the businesses' profits would be most sensitive to changes in demand for its services? Why?