Adam spent $10,000 on new equipment for his small business, “Adam’s Fitness Stud

Question

Adam spent $10,000 on new equipment for his small business, “Adam’s Fitness
Studio.” Membership at his fitness center is very low and at this rate, Adam needs an additional $12,000 per year to keep his studio open. Which of the following is true?

a. The variable cost of running the studio is $22,000.
b. The fi xed cost of running the studio is $22,000.
c. The $10,000 Adam spent on equipment is the total cost of starting the business and
the $12,000 he’ll need to continue operations is a marginal cost.
d. The $10,000 Adam spent on equipment is a fi xed cost of business and the $12,000
he’ll need to continue operations is a variable cost.

Explanation / Answer

My answer is (c) a) is not true because $10,000 is definitely not a variable cost b) is not true because $10,000 is not considered a fixed cost of running a studio. This is because this cost was already spent and should not affect future decision in running the business. c) True. d) $12,000 is not considered variable cost, because he will have to pay this amount regardless of number of customers.

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