Question

Q2. Why can the distinction between fixed costs and variable costs be made in the short run? Classify

the following as fixed or variable costs: advertising expenditures, fuel, interest on company-issued
bonds, shipping charges, payments for raw materials, real estate taxes, executive salaries, insurance
premiums, wage payments, sales taxes, and rental payments on leased office machinery. “There are
no fixed costs in the long run; all costs are variable.” Explain

Answer 1

Fixed costs cannot be changed in the short run and are the same regardless of the volume of production. Variable costs vary with production but can b changed in the short run.

Fixed costs:

• Interest on company issued bonds
• Real estate taxes
• Executive salaries
• Insurance premiums
• Rental payments on leased office machinery.

Variable costs:

• Advertising expenditures
• Fuel
• Shipping charges
• Payments for raw materials
• Wage payments
• Sales taxes

All costs are variable in the long run because all costs can be changed by investment and planning. For instance, over the long term, the company could buy the leased office machinery and not have to pay rent on it thereby stopping that fixed cost.