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Fixed costs and Variable cost

Questions:

1: Which of the following are likely to be fixed costs and which variable costs for a chocolate factory over the course of a month?  Explain your choice.

(a)           The cost of cocoa               

(b)           Business rates (local taxes).              

(c)           An advertising campaign for a new chocolate bar. ............................................

(d)           The cost of electricity (paid quarterly) for running the mixing machines .................

(e)           Overtime pay      

(f)            The basic minimum wage agreed with the union (workers must be given at least one month's notice if they are to be laid off).               

(g)           Wear and tear on wrapping machines.           

(h)           Depreciation of machines due simply to their age.      

(i)            Interest on a mortgage for the factory: the rate of interest rises over the course of the month.          .

Answer:

a) Cost of cocoa is a variable cost because this is the main ingredient being used and its quantity can be increased or decreased by the firm.

b) This is fixed cost as taxes do not change over a month.

c) This will a fixed cost as the cost of advertisement does not depend upon the quantity of chocolate being produced.

d) Fixed cost, as the bill is being paid quarterly.

e) Variable cost, as overtime payment has to be done in the current month and it also depends upon the quantity of chocolate being produced.

f) The advance notice period of one month makes this cost a fixed cost which would otherwise have been a variable cost component.

g) Variable cost, as the machines will have to be repaired immediately and it again depends upon the quantity of chocolates being produced.

h) Fixed cost, as whether production happens or not, the machines will depreciate over the period of time.

i) Fixed cost, as it is not related to the production of chocolate; whether chocolates are being produced or not is irrelevant to this cost.

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