2. Why can the distinction between fixed costs and variable costs be made in the
ID: 1153955 • Letter: 2
Question
2. Why can the distinction between fixed costs and variable costs be made in the short run? Classify the following as fixed or variable costs: advertising expenditures, fuel, interest on company- issued bonds, shipping charges, payments for raw materials, real estate taxes, executive salaries, insurance premiums, wage payments, depreciation and obsolescence charges, sales taxes, and rental payments on leased office machinery. "There are no fixed costs in the long run; all costs are variable." Explain.Explanation / Answer
ans.....
The distinction can be made because there are some costs that do not vary with total output. These are the fixed costs that, fundamentally, are related to the scale or size of the plant. In the short run, by definition, the scale of the plant cannot change: The firm cannot bring in more machinery or move to a larger building. All costs that are related to the scale of the plant—costs that continue to be incurred even though the firm’s output may be zero—are fixed costs. On the other hand, the firm can increase its output by using its plant—its fixed capital—more intensively, that is, by hiring more labor, or by using more materials. But by doing so, it will increase its operating costs, its variable costs.
Advertising expenditures: variable costs (although it may be reasonable to argue a fixed component).
Fuel: variable costs.
Interest on company issued bonds: fixed costs.
Shipping charges: variable costs.
Payments for raw materials: variable costs.
Real estate taxes: fixed costs.
Executive salaries: fixed costs.
Insurance premiums: fixed costs.
Wage payments: variable costs.
Sales taxes: variable costs.
Rental payments on leased office machinery: fixed costs (although it is possible that short-term lease arrangements on some types of office equipment may rise or fall with output).
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.