Lava Rocks: Fixed Costs Vs. Variable Costs

Lava Rocks has fixed costs and variable cost that must be paid. A member of my team has expressed her idea of converting Lava Rocks fixed costs to variable costs. I will discuss in the following paragraphs if this will hinder Lava Rocks growth or support its growth. Lava Rocks has been operating for 6 years now so they must be handling their finances really well.

"In production, fixed costs are the costs that do not vary with the number of goods produced." (Economics, 2006) Lava Rocks fixed costs consist of property taxes, rent, and any incurred loans. Lava Rocks must have a sufficient income to cover their fixed costs. Whether Lava Rocks has reached its goal of selling 50 bikes a day or not, it still has fixed costs that must be paid.

"Variable costs are costs that can be varied flexibly as conditions change." (Fixed and Variable Costs) Lava Rock Bicycles has provided me with a list of variable costs that include: Component parts and packaging, production labor, and sales commissions. Component parts consist of a frame, a seat, a set of handlebars, gears & shifting system, braking systems, aero bars, 2 wheels, and 2 tires. The production labor consists of the assembly of the bikes. The sales commissions are quite self-explanatory in that they are the rewards the sales staff receives for selling Lava Rocks bicycles. Their current variable cost will need to be analyzed in both the financial accounting and management accounting.