Which of the following is most likely to be a fixed cost?
A. Shipping charges.
B. Monthly property insurance payments.
C. Weekly wages for unskilled labor
D. Expenditures for raw materials
The correct answer and explanation is:
Correct Answer: B. Monthly property insurance payments
Fixed costs are business expenses that do not change with the level of production or sales volume. They remain constant regardless of how much a company produces or sells during a specific period. These costs are incurred even if the output is zero.
Monthly property insurance payments are a classic example of a fixed cost. This is because the insurance premium must be paid regularly and is not influenced by the quantity of goods or services produced. Whether a company manufactures ten units or ten thousand units, the insurance cost on its property or facility remains the same. This payment is predetermined and contractually agreed upon, making it predictable and stable over time.
In contrast, the other options listed are variable or semi-variable costs. Shipping charges (Option A) often depend on the volume and destination of goods being shipped, so they fluctuate with the level of production or sales. Weekly wages for unskilled labor (Option C) can also vary depending on the number of workers employed or the number of hours worked, especially in businesses that adjust labor to meet production demands. Expenditures for raw materials (Option D) clearly vary directly with the quantity of goods produced, since more production typically requires more materials.
Understanding fixed costs like monthly property insurance payments is important for budgeting, pricing strategies, and break-even analysis. Businesses must cover their fixed costs through revenues before they begin to make a profit. Identifying which expenses are fixed helps in planning for times of low production, as these costs must be paid regardless of operational activity. Therefore, controlling fixed costs and accurately accounting for them is vital for long-term financial health.