Question

Home Entertainment Online (HEO) operates an online streaming service. The company offers both a movie and a music subscription service. HEO reports revenues for the movie service separately from the music service.

Required:

Classify each of the following cost items (A–G) as:

1. Direct or indirect (D or I) costs with respect to the total number of movie subscriptions sold
2. Variable or fixed (V or F) costs with respect to how the total costs of the movie service change as the total number of subscriptions sold changes. (If in doubt, select on the basis of whether the total costs will change substantially if there is a large change in the total number of subscriptions sold.).
3. Provide comments as to why you classified the cost as D or I or V or F

You will have two answers (D or I; V or F) for each of the following items:

	Cost item	D or I	V or F	Comments
A	Electricity costs of HEO office (bill covers entire office)
B	Costs of licence fees paid to filmmakers for access to their films for five years
C	Subscription to Movie Trends website for all staff for one year
D	Leasing of computer software used for financial budgeting at HEO office
E	Cost of popcorn voucher to be redeemed at a supermarket, provided free to all customers of HEO
F	Insurance policy for HEO office
G	Costs of royalty fees paid to a filmmaker who wishes to be paid per subscriber

Answer 1