Fred and Andrew started the FA Restaurant in 2014. They rented a building, bought equipment, and hired two employees to work full time at a fixed monthly salary. Utilities and other operating charges remain fairly constant during each month.

During the past two years, the business has grown, with average sales increasing 2% each month. This situation pleases both Fred and Andrew, but they do not understand how sales can grow by 2% each month while profits are increasing at an even faster pace. They are afraid that one day they will wake up to increasing sales but decreasing profits.

Explain why the profits have increased at a faster rate than sales. Use the terms variable costs and fixed costs in your response