Explain Whether Each of the Following Is a Fixed Cost

question 303

Essay

Explain whether each of the following is a fixed cost or a variable cost for Damian Dandridge's tattoo parlor.
a.The payment he makes to buy tattoo ink.
b.The wages he pays his employees.
c.The $500-per-month payment he makes to advertise his shop on highway billboards.
d.The lease payment he makes to the landlord who owns the building where his shop is located.
e.The payment he makes on his liability insurance policy.

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Definitions:

Variable Cost

Expenses that change in proportion to the activity of a business such as raw materials and direct labor costs.

Fixed Cost

Payments that do not vary with the amount of production or sales activities, including costs like renting spaces, salary payouts, and insurance contributions.

Operating Leverage

Operating leverage describes the extent to which a company can increase its profits by increasing sales, highlighting the ratio of fixed costs to variable costs.

Net Operating Income

The amount of profit a company makes from its normal business operations, excluding any income or costs from investments and other non-core business activities.