Question:
Fixed versus variable cost behavior
Walter Entertainment sells souvenir T-shirts at each rock concert that it sponsors. The shirts cost $9 each. Any excess shirts can be returned to the manufacturer for a full refund of the purchase price. The sales price is $15 per shirt.
Required
a. What are the total cost of shirts and cost per shirt if sales amount to 2,000, 2,500, 3,000, 3,500, or 4,000?
b. Is the cost of T-shirts a fixed or a variable cost?
c. Draw a graph and plot total cost and cost per shirt if sales amount to 2,000, 2,500, 3,000, 3,500, or 4,000.
d. Comment on Walter's likelihood of incurring a loss due to its operating activities.