Question

2. Consider the actions below. Classify each cost as variable, fixed, or semi-variable and explain the classification. How would each of these actions impact the firm’s breakeven level?

a. Hire a new salaried employee

b. Pay part-time employees a higher minimum wage

c. Purchase additional radio advertising spots for the current month

d. Use a cash discount to reduce the cost of products purchased to be sold

Answer 1

Answer
a.Hire a new salaried employee
Variable Cost
Employee hiring is directly proportional to the output. A new employee is hired, means that output needs to increase.
This will increase the break even to a greater level of output as it increases cost

b. Pay part-time employees a higher minimum wage
Semi variable Cost
Part time emploee are semi variable as they are needed as and when required to meet the temporary demand for increased output.
This will increase the break even to a greater level of output as it increases cost

c.Purchase additional radio advertising spots for the current month
Fixed Cost
This is independent of the level of output. This is a fixed cost as increase or decrease in output will not change the cost for advertising.
This will increase the break even to a greater level of output as it increases cost

d. Use a cash discount to reduce the cost of products purchased to be sold
Variable cost
This cash discounts reduces variable costs of the firm, and is directly proportional to the level of output.
This will decrease the break even to a lower level of output as it decreases cost.

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