Question

Briefly describe variable, fixed, mixed, and step costs, and indicate how the total cost function of each changes as activity increases within a time period. Give 3 examples of each type of cost (only one example of step costs).Minimum 200 words

Answer 1

Answer:

Explanation:

• Variable costs are costs that varies with activity level. It means that these costs changes as more and more goods and services are produced by a company. Total variable cost changes with change in output produced by a firm in the long run.

Examples of variable costs are costs of raw materials used in producing goods, direct labor costs, sales commission etc.

• Fixed costs are costs that does not vary with activity level. This means that these costs remains the same as more and more goods are produced by a company. The total fixed cost does not change with changes in output produced by a company in the short run.

Examples are rent payments, salaries, depreciation.

•Mixed costs are costs that have components of both fixed and. variable costs. The fixed part of mixed cost remains unchanged as activity level increases or decrease while the variable part changes with activity level. The fixed part of a total cost function of a mixed cost remains the same as activity level increases in the short run, while the variable part changes with output level in the long run.

Examples are utilities, insurance, operating license

•Step costs. These are costs that remains the same at an activity level but increases or decreases when the threshold of an activity is achieved.

Example is a factory production supervisor salary