Suppose Larry's Lariats produces lassos in a factory, and uses nine feet of rope to make each lasso. The rope is put into a machine that automatically cuts it to the right length, then seals the ends to prevent fraying. The rope is then hand tied, dipped, and wound before being placed in a packaging machine to prepare it for retail sale. Which of the following would be considered a fixed cost for this company?
a. The cost of rope
b. The packaging material
c. None of these would be considered a fixed cost.
d. Employee wages

C. None of these would be considered a fixed cost.

Explanation:

Fixed cost is a cost that do not vary with any level of output. It is a cost that does not change irrespective of an increase or decrease in a company's production output.

Example of fixed cost are interest payment on loan, payment of rent, depreciation and cost of land acquisition. All these costs remain the same no matter how high or low production output is.

As in the case above,

•The cost of rope would form part of the total cost (which is sum of all the cost expended by a company in certain production output) and NOT a fixed cost because the rope is used to prepare the final packaged product.

•The packaging material would also form part of the total cost. The cost expended on this material is what makes it a total cost as it forms part of the final production output.

•Employee wages would be regarded as variable cost(cost that vary with the level of output) because it is a production company, hence employee's wages will be dependent on the number of products they are able to produce.

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