Tell whether each of these expenses of a textile mill is a fixed cost or a variable cost, and why.
(a) repairs to a leaking roof
(b) cotton
(c) food for the mill's cafeteria
(d) night security guard
(e) electricity
I see only one item that is a variable cost. Which do you think it is? Why?
We'll be glad to check your answer.
I think that electricity is the variable cost.
Yes, electricity is a variable cost. Since variable costs are expenses that change in proportion to the activity of a business, then the mill will pay more for electricity when it is producing more goods.
I would argue that cotton is also a variable cost. The amount of raw cotton the mill buys should be in direct proportion to the level of output.
To determine whether each expense is a fixed cost or a variable cost, we need to understand the characteristics of each type.
1. Fixed Cost: A fixed cost remains constant regardless of changes in production or activity levels. It doesn't fluctuate with the volume of output.
2. Variable Cost: A variable cost, on the other hand, changes in direct proportion to the level of production or activity. It increases or decreases as the production or activity level changes.
Now, let's analyze each expense:
(a) Repairs to a leaking roof: This expense is generally considered a fixed cost. Although it may not be incurred every month or year, when it does occur, it tends to be independent of the level of production. The cost of fixing the leaking roof will likely remain the same regardless of the volume of output.
(b) Cotton: Cotton expense can be categorized as a variable cost. As the mill produces more textile products, the amount of cotton required increases, leading to a higher expense. Conversely, if production decreases, the cost of cotton will also decrease.
(c) Food for the mill's cafeteria: The expense of providing food for the mill's cafeteria is typically considered a fixed cost. It remains constant because it doesn't directly depend on the level of production. Regardless of the mill's activity, the quantity of food provided to employees in the cafeteria generally remains the same.
(d) Night security guard: This expense can be classified as a fixed cost. Similar to the cafeteria expense, the cost of employing a night security guard doesn't directly vary with the mill's production level. Whether the mill is operating at full capacity or not, the same number of guards is typically required.
(e) Electricity: The expense of electricity is usually categorized as a variable cost. It varies based on the mill's level of activity and production. Higher production levels will lead to increased electricity consumption, resulting in a higher expense. Conversely, lower production levels would reduce electricity consumption and cost.
It's important to note that while we have provided general categorizations, the classification of costs as fixed or variable may vary depending on the specific circumstances and nature of the textile mill's operations.