Tell whether each of these expenses of a textile mill is a fixed cost or a variable cost, and why.

Question

(a) repairs to a leaking roof
(b) cotton
(c) food for the mill's cafeteria
(d) night security guard
(e) electricity

Answer 1

I see only one item that is a variable cost. Which do you think it is? Why?

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Answer 2

I think that electricity is the variable cost.

Answer 3

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.

Answer 4

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.