You need to cover the costs of the factory as well as staff. For the sake of this exercise, let us assume that you pay $10,000 per month to run the factory including all the equipment and utilities. In addition, you pay $10,000 per month in wages to your staff. Those costs are not going to change no matter how many night creams you sell. If you did not sell any night cream, you would still need to pay $10,000 per month for the factory and $10,000 per month in wages. Those are your fixed costs. Fixed costs do not change as the level of production goes up or down.

Your fixed costs are $_____ per month.

Now you need to buy ingredients for the night cream. Once you add up the costs of the ingredients and packaging for the night creams, you find that it is a total of $300 for 100 night creams. Hence, each night cream costs $Answer.00 in ingredients and packaging.

In other words, every night cream you sell is going to have a variable cost of $Answer.00.

Variable costs do change, as production is increased or decreased.