For each of the following costs, decide whether or not it is a fixed cost or a v

Question

For each of the following costs, decide whether or not it is a fixed cost or a variable cost for the firm in the short-run. Provide a brief argument for your classification of the cost. a) A one-year lease on the building in which the building is located. b) Annual property taxes that are assessed on the value of the land the business owns. c) The cost of a necessary metal used in the production of the firm’s product. d) A 10-year-old metal stamping machine that has a useful life of 20 years in your business and is sufficient to produce any desired level of output for the firm. e) Sugar that the firm uses to make the cookies it sells.

Explanation / Answer

Variable costs change according to the quantity of a good or service being produced. The amount of materials and labor that is needed for to make a good increases in direct proportion to the number of goods produced. The cost "varies" according to production.

Fixed costs are independent of the quality of goods or services produced. Fixed costs (also referred to as overhead costs) tend to be time related costs including salaries or monthly rental fees.

Fixed costs are only short term and do change over time. The long run is sufficient time of all short-run inputs that are fixed to become variable. Based on the above facts the given cases are classified as follows:

1.A one-year lease on the building in which the building is located is a fixed cost.

2.Annual property taxes that are assessed on the value of the land the business owns is a fixed cost

3.The cost of a necessary metal used in the production of the firm’s product is a variable cost.

4.A 10-year-old metal stamping machine that has a useful life of 20 years in your business and is sufficient to produce any desired level of output for the firm is a fixed cost.

5.Sugar that the firm uses to make the cookies it sells is a variable cost.

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