Question

Plaza Corporation observed that when 25,000 units were sold, a particular cost amounted to $70,000, or $2.80 per unit. When volume increased by 15%, the cost totaled $80,500 (i.e., $2.80 per unit). The cost that Plaza is studying can best be described as a:

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

Answer 1

The cost Plaza Corporation is studying is a variable cost because it remained constant per unit regardless of an increase in volume.

Step-by-step explanation:

The cost in question is a variable cost. This is evident because the cost per unit did not change; it remained at $2.80 per unit even as the quantity sold increased by 15%. When the sales volume increased from 25,000 units to 28,750 units (an increase of 15%), the total cost also increased proportionally from $70,000 to $80,500. If the cost were fixed, the total cost would remain constant regardless of the number of units sold, so option B. fixed cost would be incorrect. Likewise, a semivariable or step-fixed cost would change in increments or have a combination of fixed and variable element, which is not indicated here.

The cost that Plaza Corporation is studying can best be described as semivariable cost.

A semivariable cost is a type of cost that has both fixed and variable components. In this case, the cost of $2.80 per unit remains the same regardless of the volume, which makes it a fixed component of cost. However, the total cost increases as the volume increases by 15%, making it a variable component of cost. Therefore, the cost observed by Plaza Corporation exhibits characteristics of both fixed and variable costs, making it a semivariable cost.