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Fixed, variable, or mixed? An understanding of cost concepts is certainly necessary in the business world, but it also is very valuable when considering your

Fixed, variable, or mixed?

An understanding of cost concepts is certainly necessary in the business world, but it also is very valuable when considering your own personal finances.

Think about costs that you or your parents pay while you are attending OSU. Identify at least 5 routine cost examples (associated with you personally). Examples include rent, utilities, groceries, clothing, cell phone, car expenses (other than gas), gas, and entertainment. Then, indicate whether each cost is (a) fixed, (b) variable, or (c) mixed (place an "X" in the appropriate column).

Note that cost classification may vary across your group members. For example, if you rent an apartment with utilities included, both your rent and utilities costs are fixed. However, if you rent an apartment and pay the City of Stillwater for your water and electric costs, your rent may be fixed, but your utilities are mixed. That's because you must pay the city a minimum fee plus an additional charge per gallon of water and kilowatt hour of electricity used.

Expense

Approximate cost per month

Fixed

Variable

Mixed

1.

$

2.

$

3.

$

4.

$

5.

$

6.

$

7.

$

8.

$

9.

$

10.

$

Relative to variable costs, do fixed costs present different personal financial risks? Explain.

Semester Case - My Assistant

As you know from your pre-class work, this semester we'll be completing tasks related to the business ventures of entrepreneur W.T. Anderson. Building on the work you did before class, let's help W.T. sort out the cost environment for his new business, My Assistant.

Part 1

Although he's not open for business yet, W.T. has begun gathering information about the different types of costs that will be associated with his new errand running business. He realizes it's necessary to first understand what costs he'll incur so that he can appropriately price his services.

He plans to use Facebook to manage his business and won't have a physical office. So his costs will mainly involve advertising, customer management, collecting payments and gas for his car. Classify each of the costs below as fixed, variable, or mixed:

Advertising and customer management. W.T. will be advertising his business in two ways:

oSmall weekly ad in the Stillwater News Press. Cost per month: $120

oSocial Media. A friend of W.T.'s helped manage the social media accounts at her summer internship and thinks she can really help him build brand recognition and attract customers. Additionally, she will help him schedule jobs using Facebook. She's agreed to manage his business social media accounts for a flat rate of $100 per month. However, because part of her job will involve interacting with customers, she knows more time will be required as W.T.'s business grows. So, they agreed she would also receive $1 per appointment she schedules.

Payment collection. W.T. plans to collect payments using PayPal. PayPal charges are based in part on the amount of each transaction. Although he hasn't set prices yet, WT believes the fee for using PayPal will be around $0.75 per job.

Gas for his car. W.T.'s parents have agreed to maintain and insure his car for the remainder of the school year, so the only transportation cost associated with his business will be gas to run each errand. Based on the average miles per gallon of his car and the size of the service area he'll be offering, he thinks gas costs will be $4 per job.

1.Relative to each month of operation, are the above costs fixed, variable, or mixed?

Cost

Fixed

Variable

Mixed

Stillwater News Press ad

Social media manager

PayPal

Gas

2.Right now, we're simplifying a bit and some costs are excluded from the information provided above. Long-term, what other costs should W.T. consider?

Part 2

W.T. wants to work about 20 hours each week. He estimates that each job will take around 1.5 hours to complete, so he estimates he can complete around 50 jobs per month. However, he knows business will likely be slow at the beginning and some jobs may take less than 1.5 hours to complete. So he'd like to look at a range of possibilities. Complete the table below by filling in the missing amounts for the level of activity shown in the first row. Round all cost-per-unit figures to the nearest whole penny.

Number of jobs

25

50

75

Total costs per month

Fixed

$

$

$

Variable

$

$

$

Total costs

$

$

$

Cost per job

Fixed

$

$

$

Variable

$

$

$

Total cost per job

$

$

$

Computations:

1.Why does the cost per job decrease as the number of jobs increases?

2.Using Excel, create a graph to plot total cost and cost per unit if W.T. completes 25, 50, or 75 jobs per month.

3.What are W.T.'s major business risks? How can they be minimized?

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