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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 leas

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Answer:

Variable costs vary with the volume of production and can be changed in the short run.

Fixed costs do not vary with the volume of production and cannot be changed in the short run. Only in the long run can they be changed.

Variable costs:

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

Fixed costs:

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