Managing Fixed and Variable Cost for Starbucks and McDonald's Essay

Introduction

In production, the costs incurred are classified into two; fixed and variable costs. Fixed costs comprise of the expenditures made by an organization regardless of whether it is making profits or not such as rent, machinery, structures, and permanent employees. On the other hand, variable costs vary with the amount of output in a firm (Glavan, Gradisar, Strmcnik & Music, 2013). These may include wages, materials used for production, and utilities. The same case applies to Starbucks and McDonalds, which are fast food chains, involved in the production process. Both firms can be said to have both high fixed and variable costs.

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Discussion

The key fixed costs incurred by the two firms include the rent or cost of structures, furniture, land electronics, machines such as the coffee makers, coffee grinders, espresso machines, and branding machines. On the other hand, variable costs include additional or part-time workers, cost of inputs such as coffee, marketing fees, and purchases. The variable cost of production increases during the peak seasons such as winter, or times of the day such as mornings and evenings. This means that the firms experience higher variable costs as the production and demand for their products increase.

Fixed Cost Analysis

To set up retail shops and to equip them to require massive capital investment. The value of setting up and fitting a single outlet varies from $955,708 to $2.3 million, which is determined by the size of such a restaurant and its geographical location (Hayley, 2014). However, the firms have been able to reduce the costs of permanent structures by involving franchisors, who incur the initial start-up capital according to McDonald's. Starbucks also utilizes franchises though on a limited basis. As at the financial year ended 2017, the fixed assets owned by Starbucks ranged at 4.92 billion dollars, a slight increase from the financial year ended October 2016 (Nasdaq b, 2018). These costs included land, buildings, lease improvements, store equipment, roasting equipment, furniture, and fixtures. On the other hand, McDonald's posted a total fixed assets cost of $22.804 billion, which represented a significant improvement from the financial year ended December 2016 (Nasdaq, 2018). Such figures indicate a massive investment in capital, which is necessary regardless of whether the firms are making profits or losses. Thus, for organizations such as Starbucks and McDonalds, the fixed costs are usually high due to their consumption of a significant amount of fixed assets.

Additionally, the variable costs for the two enterprises are usually high. The extra cost incurred by the firms as a result of an increase in demand for their commodities are usually high. For instance, in McDonald's, purchases accounted for 31% of the total expenditure in the financial year ended 2017. Wages accounted for 24.6%, while marketing accounted for 3.4% of the total costs (Nasdaq, 2018). These accounts for more than 59% of the overall expenditures incurred by the retailer in the year, Additionally, Starbucks spent $282.6 million in the advertisement, $8.44 billion in wages and $9.038 billion in purchases. This accounts more than 55% of the firm's total expenditure in the 2016/2017 financial year (Nasdaq b, 2018). Thus, such data indicates how the variable costs by these enterprises are high across the financial year.

Conclusion

Starbucks and McDonalds can be said to have both high fixed and variable costs. For instance, as at the financial year ended 2017, the fixed assets owned by Starbucks ranged at 4.92 billion dollars, while McDonald's posted a total fixed assets cost of $22.804 billion. Additionally, the variable costs varied at 55% and 59% between the two enterprises, indicating the high values of both the McDonalds and Starbucks.

References

Glavan, M., Gradisar, D., Strmcnik, S., & Music, G. (2013). Production modeling for holistic production control. Simulation Modelling Practice and Theory, 30, 1-20. doi: 10.1016/j.simpat.2012.07.010.

Hayley, P. (2014). Want to Open a McDonald's? Here's What It Will Cost You. Retrieved from http://www.thefiscaltimes.com/2014/11/18/Want-Open-McDonald-s-Here-s-What-It-Will-Cost-You.

Nasdaq b. (2018). SBUX Company Financials. Retrieved from https://www.nasdaq.com/symbol/sbux/financials?query=balance-sheet. Nasdaq. (2018). MCD Company Financials. Retrieved from https://www.nasdaq.com/symbol/mcd/financials?query=balance-sheet.