Question

Each of Davidson's production managers (annual salary cost, $45,000) can oversee 60,000 machine hours of manufacturing activity. Thus, if the company has 50,000 hours of manufacturing activity, one manager is needed; for 75,000 hours, two managers are needed; for 125,000 hours, three managers are needed; and so forth. Davidson's salary cost can best be described as a:

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

Answer 1

The cost described in this question is a step-variable cost. Hence, the correct answer is option (C).

Step-by-step explanation:

A step-variable cost is a cost that remains constant within a specific range of activity levels but jumps to a different level when activity crosses a certain threshold. In this case, the salary cost remains constant within each range of machine hours overseen by one manager but increases when additional managers are needed as the activity level crosses specific points.

The cost described in this question can best be described as step-variable cost. This is because the salary cost of each production manager is fixed at $45,000 per year, regardless of the number of machine hours. However, the number of managers needed increases in increments based on the number of machine hours. For example, with 50,000 hours one manager is needed, with 75,000 hours two managers are needed, and so on.