1. Suppose you are the owner of a tile company who purchases tiles from a supplier at a rate of $5 each.
a. The variable cost is the cost that depends on the quantity, such as how many tiles are purchased. If you buy 100 tiles at $5 each, how much have you spent on tile? What if you buy 500 tiles? (As required with every calculation on the worksheet, please demonstrate your steps even though you may be able to calculate mentally.)
b. The fixed cost does not depend on the quantity that you purchase. For example, an ATM fee at the gas pump is a flat amount that does not depend on how many gallons of gas are purchased. It is fixed (not variable) cost.
a. To calculate the total cost of tiles when buying 100 or 500 tiles, you need to multiply the quantity by the cost per tile.
For 100 tiles:
Total cost = Quantity x Cost per tile
Total cost = 100 tiles x $5 per tile
Total cost = $500
For 500 tiles:
Total cost = Quantity x Cost per tile
Total cost = 500 tiles x $5 per tile
Total cost = $2500
Therefore, if you buy 100 tiles, you will spend $500 on tiles. If you buy 500 tiles, you will spend $2500 on tiles.
b. Fixed costs are costs that do not depend on the quantity purchased. In this case, the fixed costs would be expenses that remain constant regardless of the number of tiles purchased. Examples of fixed costs in the context of a tile company could include rent for the tile company's premises or employee salaries.
To identify the fixed costs in your tile company, you need to review your expenses that remain constant regardless of the quantity of tiles purchased. These expenses should be identified separately from the variable costs, such as the cost of purchasing the tiles.
Once you have identified the fixed costs, you can calculate the total fixed cost by simply summing up those expenses. The fixed cost remains the same regardless of the quantity of tiles purchased.