CHAPTER 3 PROBLEM E3.7

[Nigel McCallum (Admin)]

B/I. Couldn't wages be considered a variable cost since an increase in the number of products sold would mean you would need to higher more workers or increase hours?
F. Insurance premiums increase with increased shipments/number of products sold. If there were no shipments the insurance cost would be $0 meaning there is no fixed cost. Shouldn't this be considered a variable cost?
H. Wouldn't increasing the number of products sold lead to an increase in inventory? More inventory would likely mean more computers would be needed for workers who are managing the inventory. So isn't this a variable cost?

Just trying to get a handle on these definitions. It seems they're not 100% black and white. Any input would be appreciated.

[Alisha Johnson]

Nigel,

Here's the way I understand it. When looking at costs versus revenues and figuring out your breakevens, you have to look at the relevant range and how you define "wages." The relevant range assumes realistic patterns of what your business can handle. If you were to grow and need more employees, that is great, but outside of the relevant range that you are currently using to make your decisions. That being said, wages (salaries) would then be looked at as a fixed cost because you know your operating range and the number of employees needed to maintain it. However, if you were doing wages based on commission, that would be variable because even in the relevant range that number would change. If you use a combination of base salary plus commission, that would be mixed. So to make things simple, assume the current operating levels and determine if the person is paid salary, commission, or both.

I hope that helps. Maybe someone else has a better way of looking at it.

[Nigel McCallum (Admin)]

Thank you! I wasn't using the relevant range concept. I suppose an easy way to think about it would be to ask how the activity driver affects cost/revenue while the business is still the same size. And that makes sense for the insurance premiums too since zero production would be outside the relevant range. The premium would always be there regardless of production within the relevant range (fixed cost) though it would increase or decrease disproportionately as production changed (variable cost). That would make it a mixed cost which is the correct answer.

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