Question

The local government is running a flu vaccination program. Are the following costs fixed, variable, or step costs?(

a) Costs of occupancy

(b) Costs of management

(c) Costs of part-time employee salaries based on service volume

(d) Costs of vaccine consumed

2. Clifftown’s Parks and Recreation Department is introducing a new summer program for children in elementary school. Programming runs from 8:00 a.m. to 5:00 p.m., Monday through Friday. The proposed camp is 10 weeks long and is planned for 50 children. Fixed costs, which include equipment and facilities costs, are estimated at $5,000 for 10 weeks. The facilities and equipment can accommodate up to 100 children per week, which is the maximum the depart-ment is willing to enroll in any given session. There will be 5 camp counselors each week for the 50 children, at a total cost of $2,000 per week for the 5 counselors. The department is comfort-able with each counselor being responsible for 11 children. Any more than that and an additional counselor will need to be hired. The camp will serve lunch and snacks on each weekday, at a weekly cost of $15.

(a) Identify the fixed, step, and variable costs.

(b) What would be the cost of the program for 50 children?

(c) What would be the cost of the program for 75 children?

3. Desert Vista Homeless Campus provides shelter and breakfast to individuals in need. Local governments and several nonprofit organizations provide financial assistance to the shelter and require weekly reporting. Desert Vista’s current facility can hold a maximum of 300 people. The base weekly cost to run the shelter is $1,500. The shelter also needs 3 cooks per 75 residents to prepare a sufficient amount of food for breakfast. Cooks are paid a flat fee of $50 for each meal prepared. Breakfast costs an average of $2 per meal to prepare, excluding staff costs.

(a) Identify the fixed, step, and variable costs.

(b) What is the cost incurred by the campus for 150 people over a 1-week period?

(c) What is the cost incurred by the campus for 200 people over a 1-week period?

Answer 1

1. Fixed costs are the costs that are incurred irrespective on the amount of production or the amount of revenue the business is generating. Variable costs are those costs that increase/decrease depending on the amount of revenues or production done at the firm. Step up costs are the costs that increase in steps after a particular threshold situation is met

Now for the flu vaccination program, lets analyse the nature of the following costs.

a) Costs of occupancy: These are the costs that the company would incur for the stay of their executives who will go to provide the vaccines. So irrespective of the number of people who come for vaccination, this cost is fixed.

(b) Costs of management: Cost of management is always a fixed cost as there is 1 management team irrespective of the service volume that the flu vaccination program will generate.

(c) Costs of part-time employee salaries based on service volume: Now based on the service volume, management will hire part time employees specifically for this task. More the service volume, more will be part time hires. So this is variable cost for the management.

(d) Costs of vaccine consumed: Cost of vaccine consumed is variable as it directly depends on the number of people who turned up to get the flu vaccination. So this is variable cost.