Item: Raw Materials (cost for hamburgers)

Total Annual Cost: 650
Item: Building Rent
Total Annual Cost: 9000
Identify which cost item above is fixed and variable and why

Variable costs change based on how much of a product you produce. For example, if you're in the straw business, plastic would be a variable cost. If you make 100 million straws, you use more plastic than if you make just 50 million.

Fixed costs don't ever change based on how much you produce. This would be stuff like insurance, overhead, and utilities.

That should put you in the right direction. If you wish, we can critique your thinking on the above problem.

To determine whether a cost item is fixed or variable, we need to understand how it behaves in relation to changes in the level of business activity.

A fixed cost is one that remains constant regardless of the level of production or sales. It does not change with an increase or decrease in business activity.

A variable cost, on the other hand, fluctuates depending on the level of production or sales. It increases or decreases in direct proportion to changes in business activity.

Now, let's analyze the given cost items:

1. Raw Materials Cost: This cost item is likely to be a variable cost. The cost of raw materials for making hamburgers will increase or decrease based on the level of production. As more hamburgers are produced, more raw materials will be required, resulting in a higher cost. Conversely, if the production decreases, the cost of raw materials will decrease as well.

2. Building Rent: This cost item is typically a fixed cost. The building rent usually remains constant regardless of the level of production or sales. Whether the business is producing a high or low volume of hamburgers, the cost of the building rent remains the same.

In summary, the raw materials cost is likely a variable cost because it changes with the level of production, while building rent is most likely a fixed cost because it remains constant regardless of the business activity.