Cost item Type Month 1 ($) Month 6 ($) Factory rent Fixed 15,000 15,000 Equipment lease Fixed 12,000 12,000 Insurance Fixed 3,500 3,500 Office salaries Fixe...

(a) A fixed cost is a cost that does not change with the level of output or production. It must be paid regardless of how many units the business produces, whether output is zero or at full capacity. Examples include rent, insurance, and equipment leases. [2 marks]

(b) Two reasons why classifying costs into fixed and variable is important:

1. Setting selling prices. If Coastal Catch knows its variable cost per kilogram of fillets (raw fish, packaging, energy per unit, delivery per unit), it can use cost-plus pricing to add an appropriate mark-up, ensuring each sale covers its costs and contributes to profit. Without this classification, the business cannot accurately calculate how much each unit of output costs to produce. [3 marks]
2. Break-even analysis and decision-making. Knowing total fixed costs ($38,500 per month from the table: $15,000 + $12,000 + $3,500 + $8,000) allows the business to calculate how many kilograms of fillets it must sell to cover all costs. This break-even point is essential for planning production targets, evaluating whether to accept large orders at discounted prices, and forecasting profit at different output levels. [3 marks]

(c) From the data in Table 1, the costs that have increased the most are:

• Raw fish purchases: rose from $85,000 to $102,000, an increase of $17,000 (20%). This is the largest absolute increase and represents the single biggest cost item.
• Energy (freezing and processing): rose from $9,500 to $14,200, an increase of $4,700 (approximately 49%). This is the largest percentage increase of any cost item.
• Delivery costs: rose from $3,200 to $3,500, a modest $300 increase.

Fixed costs ($38,500) remained unchanged, as expected.

Impact on profitability: Since output has not changed, the cost per unit has increased purely because of higher variable costs. The combined cost increase across all variable items is approximately $22,200 per month ($17,000 + $4,700 + $300). Unless Coastal Catch raises its selling prices by an equivalent amount, monthly profit has fallen by approximately $22,200. If the company was already operating on thin margins, this level of cost increase could threaten the viability of the business. The raw fish cost increase alone accounts for over 76% of the total increase, making it the most critical area to address. [6 marks]

(d) Arguments for reducing variable costs:

• Variable costs make up a much larger share of total costs. In Month 6, variable costs total approximately $125,200 ($102,000 + $5,500 + $14,200 + $3,500) compared with fixed costs of $38,500. A percentage saving on variable costs therefore has a bigger absolute impact on profitability.
• The largest single cost increase ($17,000) is in raw fish purchases. Ms Lindgren could negotiate better prices with trawler suppliers, buy from additional suppliers to create competition, or source fish from alternative locations to reduce this cost.
• The 49% increase in energy costs could be addressed by investing in more energy-efficient freezing equipment or reviewing energy supplier contracts.

Arguments for reducing fixed costs:

• Some fixed costs, such as the equipment lease ($12,000), might be renegotiated at renewal. The company could explore whether cheaper premises are available to reduce the $15,000 rent.
• However, fixed cost savings are harder to achieve quickly because they often involve long-term contracts. Rent and lease agreements typically cannot be changed mid-term.

Conclusion: Ms Lindgren should focus on reducing variable costs first, because they account for over 75% of total costs and have risen the most. Negotiating supplier prices for raw fish would have the single largest impact. Fixed cost reduction is a valid longer-term strategy but offers less immediate relief. [6 marks]