Question

Macon Vitamins sells a variety of vitamins and herbal supplements to small health food stores. Macon purchases the vitamins and supplements from leading manufacturers. Identify each of the following costs incurred by Macon Vitamins in terms of its cost behavior—variable, fixed, mixed, or step.

a.	Vitamin C tablets
b.	President’s salary
c.	Sales commissions ($1.00 per case)
d.	Straight line depreciation on office equipment
e.	Shipping (billed in 100-pound increments)
f.	Advertising
g.	Telephone charges (monthly fee of $35 plus long distance charges)

Answer 1

A step cost is a cost that is fixed at a particular level of activity and changes after that level. Step cost may be different at different activity level depending upon different stages. See below example.

Level of activity	Fixed cost
50000-60000 units	$    5,00,000.00
60001-100000 units	$ 15,00,000.00
100001-200000 units	$    2,00,000.00

A mixed cost is a cost that has elements of both fixed and variable portion. Such as electricity companies charge a fixed rental and variable cost per unit of electricity consumed.

Solution

a.	Vitamin C tablets	Variable
b.	President’s salary	Fixed
c.	Sales commissions ($1.00 per case)	Variable
d.	Straight line depreciation on office equipment	Fixed
e.	Shipping (billed in 100-pound increments)	Step
f.	Advertising	Fixed
g.	Telephone charges (monthly fee of $35 plus long distance charges)	Mixed