How to Categorize Expenses

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When is a fixed cost not fixed?

Differentiating between fixed and variable costs is an important part of creating a budget. Check your understanding of these two categories.

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Sophie's company, CalcuTech, is a leading producer of business calculators.  The following statistics indicate fixed and variable costs for her company at different levels of production of their top-selling product, the MathTech calculator.

At 0 units of production (no MathTech calculators produced), CalcuTech's fixed costs are 50 and its variable costs are 0. Variable costs steadily increase at 9.09 per unit. Fixed costs remain at 50 until 300 units, at which point they jump to 100. They remain at 100 until 600 units, at which point they jump to 150. They remain at 150 until 900 units, at which point they jump to 200. This trend continues for all available data.

Currently, CalcuTech produces 500 units of the MathTech calculator. If Sophie's company decreases production to 400 units, what happens to the corresponding fixed and variable costs?

Not the best choice. Actually, a 100 unit decrease in production would lower the variable costs (the costs that change in direct proportion to production). This decrease would not affect fixed costs. For instance, Sophie's company will pay the same amount for rent whether they produce 400 units or 500 units.


Correct choice. In this instance, reducing production caused certain costs to decrease, and other costs to stay the same.  The costs that decrease—the variable costs—involve costs that will change depending on the specific number of units produced, such as shipping. The costs that stay the same—the fixed costs—involve expenses, such as rent for the factory, that will not change over a 100-unit decrease in production.


Not the best choice.  Only the fixed costs, or the costs that do not change over a decrease in production, will stay the same. Variable costs, or the costs that will change in direct proportion to the change in production, will decrease. For instance, if Sophie produces 400 units instead of 500 units, the total shipping costs will be reduced because her company will not have to pay to ship as many calculators. That means that shipping is a variable cost.


The following statistics indicate fixed and variable costs for CalcuTech at different levels of production of their top-selling product, the MathTech calculator.

At 0 units of production (no MathTech calculators produced), CalcuTech's fixed costs are 50 and its variable costs are 0. Variable costs steadily increase at 9.09 per unit. Fixed costs remain at 50 until 300 units, at which point they jump to 100. They remain at 100 until 600 units, at which point they jump to 150. They remain at 150 until 900 units, at which point they jump to 200. This trend continues for all available data. CalcuTech leases two fabrication machines, each of which produces 300 calculators. Increased demand leads Sophie to increase production of the MathTech calculator from 500 units to 800 units.

After the increase, what happens to the fixed cost, and what is a possible reason for this?

Not the best choice. While the fixed costs will increase, raw materials are a variable cost that directly correlates to production rates.


Not the best choice. Fixed costs stay the same over a wide range of production volume. In this case, the cost for leasing fabrication machines would stay the same whether Sophie was producing 300 units or 600 units. But even fixed costs can increase when drastic change occurs.


Correct choice. Sophie will need to lease another fabrication machine to meet the additional demand. While leasing a fabrication machine would usually be a fixed cost, even fixed costs can increase when large production changes occur.


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