Question

At Cleveland Hopkins International Airport in northeastern Ohio, a vending machine that dispenses socks was recently installed. Located in the C concourse, the Stance sock vending machine offers a variety of what Stance refers to as “uncommon” socks. The designs on the socks in the Cleveland airport vending machine include Cleveland Browns, Cleveland Indians, patriotic flag designs, Hawaiian tropical flowers, and others.

The machine is stocked with an assortment of socks. The airport traveler inserts a credit card, makes a sock selection in the keypad, and the socks are dispensed to the purchaser.

Stance sells its socks through retailers, at its own stores, via vending machines, and through monthly subscriptions.

1. Are Stance’s costs mostly variable or fixed? What impact does this cost structure have on the break-even volume for Stance’s operation of that vending machine?
2. Now classify each of the costs you listed for Question 1 as direct or indirect, assuming that the vending machine is the cost object.
3. How would the classification of costs as direct or indirect change when the cost object shifts from the Cleveland airport sock vending machine to the overall sock product line at Stance?

(Answer one paragraph for each question)

Answer 1

Stance's costs are mostly fixed as the vending machine cost, installation, rent, etc are fixed. No matter what the sales, these costs will be fixed. Since cost is fixed, stance's will have to sell a minimum number of socks for breakeven. Let's assume the fixed costs are $1,000 and the price of one sock is $10. Then the minimum quantity to sell will be 1000/10 = 100 socks.

Note: Some costs are variable but the cost will be minimal in this case

Costs related to the vending machines. are

1. rent - direct
2. cogs - direct
3. wages-direct
4. service and maintenance - direct
5. transport - indirect
6. insurance - indirect
7. salary - indirect
8. tax - indirect
9. administrative - indirect
10. depreciation - indirect

When the company shifts from a vending machine to an overall sock product line strategy, cost structure will completely change. It will look like this:

• Fixed costs. Administrative overhead, manufacturing overhead, direct labor

• Variable costs. Direct materials, commissions, production supplies