Question

In producing a product, a firm has both fixed costs and variable costs. Fixed costs are costs that must be paid regardless of how many units are produced and sold. Variable costs, on the other hand, fluctuate directly with sales volume. The more you produce, the higher your variable costs. Let's try this out. Using your client’s crystal soap business, indicate which costs are fixed and which are variable by dragging them onto the correct side of the ledger.

Answer 1

The cost are as follows:

rent, raw materials, production, utilities, shipping, insurance,

Answer:

Fixed cost> rent, insurance, utilities

Variable cost> raw materials, production cost, shipping cost

Explanation:

Remember, it was mentioned that Fixed costs are costs that must be paid regardless of how many units are produced and sold; which implies that they do not change so frequently.

Thus, we would expect rent paid by Crystal soap to be fixed overtime, her insurance payments as well as utilities she pays for like power etc would also fall under fixed cost.

Variable costs, on the other hand, fluctuate directly with sales volume. Therefore, Crystal soap business would incur varying cost amount for raw materials, production cost, and their shipping cost.