Question

Dizzy Amusement Park is open from 8:00 am till midnight every day of the year. Dizzy charges its patrons a daily entrance fee of $30 per person which gives them unlimited access to all of the park's 35 rides. Dizzy gives out a free T-shirt to every 100th customer entering the park. The cost of this T-shirt would best be described as a:

Answer 1

Answer: c. step-variable cost

Explanation:

Step variable costs are variable costs in that they change in relation to the level of activity.

They are different from true variable costs however because they are only incurred at certain points. In other words, they are only incurred when the level of activity reaches a certain point.

In this case, the cost of the shirt is incurred depending on activity so it is a variable cost. It will however only be incurred at certain activity levels which fits the definition of a step-variable cost.