Cost

1. Which of the following costs would be a fixed cost for Carl; a confectionery manufacturer?
a) Sugar
b) Electricity costs to run the manufacturing machines
c) Hourly paid wages
d) Supervisor's salary

2. Which of the following is a definition for variable costs

a) Costs that remain the same whatever the level of output
b) Costs that contain a fixed and variable element
c) Costs that vary directly with the number of units produced
d) Costs that will remain fixed as output increases until the activity reaches a level where the costs have to
increase sharply
3. Luke is arranging for a party to be held in the students' union. The use of the hall will be free but security costs of
300 will have to be met. The cost of the main band will be 2,500 and the supporting band will cost 450. Tickets
will be priced at 15 each. On arrival, every ticket holder will be given a bottle of water, worth 1 per bottle. What
are the total fixed costs for this event?
a) 3,250
b) 2,500
c) 1
d) 15

4. Luke is arranging for a party to be held in the students' union. The use of the hall will be free but security costs of
300 will have to be met. The cost of the main band will be 2,500 and the supporting band will cost 450. Tickets
will be priced at 15 each. On arrival, every ticket holder will be given a bottle of water, worth 1 per bottle. What is
the break-even number of tickets for this event?
a) 179 tickets
b) 167 tickets
c) 217 tickets

d) 233 tickets

5. Which of the following is a definition of break-even point?

a) The difference between the selling price of a product and the variable costs incurred in producing that
product
b) The fixed plus variable costs of the business
c) The situation where neither a profit or a loss is made
d) The situation where a profit is made

1. As volume decreases, total fixed costs

a. are constant and cost per unit decreases
b. are constant and cost per unit increases
c. increase
d. decrease
2. Fixed costs that management can decide not to incur at any time are
a. always variable costs
b. unavoidable costs
c. value-added costs
d. discretionary costs
3. Which of the following is the least likely to be a fixed cost?
a. Utilities
b. Executive management salaries
c. Advertising
d. Copier maintenance
4. When a cost changes in total in direct proportion to changes in volume it is
c. a variable cost
d. a fixed cost
5. Which of the following states how a variable cost behaves as quantity changes?
a. remains constant in total and remains constant per unit
b. remains constant in total and changes per unit
c. changes in total and remains constant per unit
d. changes in total and changes per unit
6. Within the relevant range
a. total variable costs decrease as production increases
b. fixed costs per unit decreases as production decreases
c. total fixed costs remain the same when production increases or decreases
d. total variable costs remain the same when production increases or decreases

7. The following are costs that were incurred by Nike, Inc. Determine which
costs are fixed (F) and which are variable (V).
1. rubber for the sole of the shoe, $6 per shoe
2. rent on the manufacturing facility building, $188,000 annually
3. sales manager salary, $127,000 annually
4. worker who operates the machine that puts the shoe together, $2 per shoe
5. shoe laces, $1.80 per shoe
6. worker who puts the shoes in the shoe box, $0.20 per shoe
7. insurance on the manufacturing facility, $23,000 annually
8. water and utilities, $22,000 per month consistently
9. depreciation on manufacturing equipment, $18,000 each month
10. already contracted advertising on television, $1,800,000 annually
11. sales commission paid to salespeople based on 5% of sales
12. office supplies, usually approximately $3,000 per month
13. paper for the copier in the executive offices, usually about $1,200 per month
14. glue used in the shoe, approximately $0.18 per shoe
15. company jet lease, $14,000 per month

Answer + Explanation
1B. Fixed costs do not change as volume changes. (c. & d.). The cost per
unit changes the opposite as volume changes. As volume decreases,
cost per unit increases. This is because cost per unit is calculated:
Total fixed costs divided by volume = fixed cost per unit.
2D. Discretionary costs by definition are costs that management does not have to
incur. They are therefore not unavoidable and can be either fixed or variable.
Value-added costs normally enhance the product and this would not be
something that management would normally not incur.
3A. The cost of utilities is usually determine by the amount used and is normally
mixed or variable. All salaries are fixed annually. Advertising is generally
spent based on a predetermined amount which does not change because
volume changes, making it a fixed cost. Copier maintenance is normally
paid for in equal amounts monthly based on an agreement, which is fixed.
4C
5D
6C
7. All costs that are annually or monthly are fixed. They do not change because
production or sales is more or less.
All costs that are per shoe are variable. Each time another shoe is produced,
this much additional cost must be incurred.
The sales commission varies with sales dollars. As sales increase the total
cost will increase. For variable costs, total costs change with changes in
sales or production.