# Fixed and Variable Costs for Best Barber

To explain fixed and variable costs in more detail, we will make use of an example of a barbershop called Best Barber.

It is estimated that the total fixed cost, which includes the space and equipment, is R320 per day. The total variable cost is the cost of hiring barbers and is estimated at R160 per barber per day. This information is provided in the following table:

Total cost for Best Barber

 Labour Quantity of haircuts TP Total fixed costs TFC (rand) Total variable cost TVC (rand) Total cost TC (rand) 0 0 320 0 320 1 16 320 160 480 2 40 320 320 640 3 60 320 480 800 4 72 320 640 960 5 80 320 800 1 120 6 84 320 960 1 280 7 82 320 1 120 1 440

In the first column, the quantity of barbers employed is given, and in the second column, the quantity of haircuts (total product) the business produces per day.

Study the first two columns of the total cost table for Best Barber and answer the following questions:

### By how much does the quantity of haircuts increase if the quantity of barbers increases from three to four?

• 24
• 20
• 12
• 8
• 4

It increases by 12. The marginal product of the fourth worker is therefore 12.

If you look closely at columns 1 and 2, you will see that as more barbers are employed, the quantity of haircuts increases.

### As more barbers are employed (from 3 to 6), the quantity of haircuts increases, but it increases at a ________ rate.

Correct. It increases at a diminishing rate (20, 12, 8 and 4) since the law of diminishing returns apply.

Think again. It increases at a diminishing rate (20, 12, 8 and 4) since the law of diminishing returns apply.

Think again. It increases at a diminishing rate (20, 12, 8 and 4) since the law of diminishing returns apply.

Column 3 indicates the total fixed cost for the different quantities of haircuts (output). Of importance here about the total fixed cost is that it is the same, namely R320, for the different output levels.

### The total fixed cost is the same for all levels of output because it involves _________.

• payments the firm must make in the short run regardless of its output level
• cost, which is under control of the management of the firm

The total fixed cost is in fact payments that do not vary with the level output, and one can say that it is not under the control, at least in the short run, of the management of the firm.

The fourth column indicates the total variable cost. Since labour is the only variable cost, the total variable costs for the different quantities of haircuts are calculated by multiplying the quantity of labour (barbers) by the wage paid. For example, three barbers would cost 3 × R160 = R480, and the variable cost associated with an output level of 60 haircuts is R480. This is entered in column 4.

If you look closely at column 4, you will notice that as the level of output (haircuts) increases, the total variable cost rises as well. This is because total variable cost is linked to the level of output, and the higher the level of output, the higher the total variable cost is.

### What is the total variable cost associated with an output level of 60 haircuts? What is the total variable cost associated with an output level of 80 haircuts?

For 60 haircuts it is R480, and for 80 haircuts R800.

Total cost for Best Barber

 Labour Quantity of haircuts TP Total fixed costs TFC (rand) Total variable cost TVC (rand) Total cost TC (rand) 0 0 320 0 320 1 16 320 160 480 2 40 320 320 640 3 60 320 480 800 4 72 320 640 960 5 80 320 800 1 120 6 84 320 960 1 280 7 82 320 1 120 1 440

The fifth column indicates the total cost for the different output levels. The total cost is calculated by adding the fixed costs in the third column and the variable costs in the fourth column since:

Total cost = total fixed cost + total variable cost

TC = TFC + TVC

Therefore, for example, for an output level of 72 haircuts, the total cost would be R320 + R640 = R960.

Total cost for Best Barber

 Labour Quantity of haircuts TP Total fixed costs TFC (rand) Total variable cost TVC (rand) Total cost TC (rand) 0 0 320 0 320 1 16 320 160 480 2 40 320 320 640 3 60 320 480 800 4 72 320 640 960 5 80 320 800 1 120 6 84 320 960 1 280 7 82 320 1 120 1 440

If you look closely at column 5, you will notice that as the level of output (haircuts) increases, the total cost rises as well. This is because the total variable cost increases as more is produced. Notice that the total fixed cost does not change as the level of output increases.

#### Activity

Do the following activity to see if you understand the difference between total fixed and total variable costs:

### As the level of production decreases in the short run, fixed cost __________.

Think again. It is true that fixed cost stays the same. However, variable cost decreases as the level of output decreases.

Think again. Fixed cost stays the same.

Think again. Fixed cost stays the same.

Correct. It is true that fixed cost stays the same. Variable cost, however, varies as the level of output varies. If the level of output decreases, variable cost decreases, while fixed cost stays the same.

### The table below provides the cost data for Blaker Maker, a firm that manufactures garden ornaments. Fill in the missing values.

 Quantity of ornaments Q Total fixed costs TFC (rand) Total variable cost TVC (rand) Total cost TC (rand) 0 1 000 20 000 30 000 50 000 2 000 20 000 70 000 3 000 20 000 65 000 4 000 85 000 105 000 5 000 20 000 110 00 6 000 150 00 170 000 7 000 20 000 230 000
 Quantity of ornaments Q Total fixed costs TFC (rand) Total variable cost TVC (rand) Total cost TC (rand) 0 20 000 0 20 000 1 000 20 000 30 000 50 000 2 000 20 000 50 000 70 000 3 000 20 000 65 000 85 000 4 000 20 000 85 000 105 000 5 000 20 000 110 00 130 000 6 000 20 000 150 00 170 000 7 000 20 000 210 00 230 000

Note that the fixed cost of R20 000 stays the same for all levels of output, including an output level of zero. At an output level of zero, however, the variable cost is zero and the total cost is therefore R20 000.

Total cost (TC) = fixed cost (FC) + variable cost (VC). At an output level of 3 000, total cost is therefore R20 000 + R65 000 = R85 000.

Variable cost (VC) = total cost (TC) – fixed cost (FC). At an output level of 20 000, the variable cost is therefore R70 000 – R20 000 = R50 000.