Question

In discussing the operation of her automobile, Dr. Lawson once observed that gasoline is a fixed cost because the cost per gallon is relatively stable. Insurance, on the other hand, is a variable cost because the cost per mile varies inversely with the number of miles driven. Comment on the Dr. Lawson’s observation.

Answer 1

No, Dr.Lawson is wrong.

Gasoline is a variable expenses for the automobile. Because requirement of gasoline depends on number of miles run.

Where as insurance expenses is a fixed expenses because the amount of annual insurance doesn't change with fluctuations in number of miles run.

Any expenses which are fluctuating with the fluctuations of operational activity are called variable expenses. If the expenses are fixed with the fluctuation of operational activity , called fixed expenses. Here, for the automobile, the operational activity is miles run.