Suppose a pizza parlor has the following production costs: $5.00 in labor per pi

Question

Suppose a pizza parlor has the following production costs: $5.00 in labor per pizza, $2.00 in ingredients per pizza, $0.20 in electricity per pizza, $5000 in restaurant rent per month, and $500 in insurance per month.

Assume the pizza parlor produces 6,000 pizzas per month.

What is the variable cost of production (per month)?

The variable cost of production is

$nothing.

(Enter your response as an integer.)

What is the fixed cost of production (per month)?

The fixed cost of production is

$nothing.

(Enter your response as an integer.)

Explanation / Answer

1. Variable costs are that cost which vary with the level of output.

Amongst the given costs, the variable costs are - cost of labour, ingredients and electricity.

So variable cost = (5 + 2 + 0.2) per pizza

VC = $7.20.

VC for 6000 pizzas would be = 7.20 * 6000 = $43200.

2. Fixed cost are those cost which do not change with the level of output and they have to be incurred even if the production is zero.

Fixed cost = rent + insurance.

FC = 5000 + 500

FC = $5500.

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