Question

Richard Hamilton has a fast-food franchise and must pay a franchise fee of $35,000 plus 3% of gross sales. In terms of cost behavior, the fee is a:

A. variable cost.
B. fixed cost.
C. step-fixed cost.
D. semivariable cost.
E. curvilinear cost.

Answer 1

Richard Hamilton's franchise fee of $35,000 combined with an additional 3% of gross sales is considered a semivariable cost, as it includes both fixed and variable components.

Step-by-step explanation:

Richard Hamilton's fees include a franchise fee of $35,000 and an additional 3% of gross sales. Analyzing cost behavior, fixed costs are costs that do not change regardless of the sales volume. In contrast, variable costs are costs that vary directly with the sales volume. Since Hamilton must pay a constant fee regardless of sales ($35,000), this part is a fixed cost. However, the additional charge of 3% of gross sales does change with sales volume, making this part a variable cost.

Therefore, the fee can be considered semivariable cost because it contains both fixed and variable components. The fixed component is the flat franchise fee, and the variable component is the percentage of sales.