Question

Band Box Entertainment (BBE) operates a large store in Atlanta, Georgia.

The store has both a movie (DVD) section and a music (CD) section.
BBE reports revenues for the movie section separately from the music section.
Required:
Classify the following Costs that are found in the Merchandising sector.
Cost Direct/ Indirect Variable / Fixed
A. Annual retainer paid to a video distributor
B. Cost of store manager's salary
C. Costs of DVDs purchased for sale to customers
D. Subscription to DVD Trends magazine
E. Leasing of computer software used for financial budgeting at the BBE store
F. Cost of popcorn provided free to all customers of the BBE store
G. Cost of cleaning the store every night after closing
H. Freight costs of DVDs purchased by BBE

Answer 1

Direct Costs are those costs that are directly linked to the production of a good or service.

Indirect Costs are not directly related but help facilitate the production of a good.

Fixed Costs are constant throughout the production life of a good.

Variable Costs change per quantity of goods Produced.

A. Annual retainer paid to a video distributor.

DIRECT and FIXED cost.

Video distributors are directly related to the amount of DVDs that will be sold. The amount is also a constant one so it is Fixed.

B. Cost of store manager's salary.

INDIRECT and FIXED Cost.

The manager is not directly related to the buying or selling of DVDs and CDs but is a constant cost that does not change by production.

C. Costs of DVDs purchased for sale to customers.

VARIABLE and DIRECT cost.

The cost of DVDs sold will have a direct impact on the sale of said DVDs because it can determine their price. It also changes as DVD numbers change.

D. Subscription to DVD Trends magazine.

DIRECT and FIXED cost.

Subscriptions enable the store know what to get meaning it is directly related to the DVDs. It will also be a fixed amount that does not change as more DVDs are bought.

E. Leasing of computer software used for financial budgeting at the BBE store.

INDIRECT and FIXED costs.

The computer software is not directly related to the sale or procurement of the DVDs. It is also a fixed amount as it is a lease that will not change regardless of how many DVDs are bought or sold.

F. Cost of popcorn provided free to all customers of the BBE store.

INDIRECT and VARIABLE.

These costs are not directly related to the DVDs being sold. Also they change per customer that comes in so they are Variable as well.

G. Cost of cleaning the store every night after closing.

INDIRECT and FIXED.

Costs again are not directly related to the DVDs and CDs. They are however fixed as they do not change per units sold.

H. Freight costs of DVDs purchased by BBE.

DIRECT and VARIABLE.

Freight Costs to ship DVDs is a cost that can be directly associated with selling the DVDs because they determine how the DVDs will be delivered. They are variable because they depend on the number of DVDs sold.