Question

Each of Davisson's production managers (annual salary cost, $45,000) can oversee 60,000 machine hours of manufacturing...

Each of Davisson's production managers (annual salary cost, $45,000) can oversee 60,000 machine hours of manufacturing activity. Thus, if the company has 50,000 hours of manufacturing activity, one manager is needed; for 75,000 hours, two managers are needed; for 125,000 hours, three managers are needed; and so forth. Davisson's salary cost can best be described as a:

variable cost.

semivariable cost.

step-variable cost.

fixed cost.

step-fixed cost.
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Homework Answers

Answer #1
  • The correct answer is Option no. ‘5’: Step Fixed Cost.
  • Step Fixed Costs are costs that are ‘fixed’ in nature but changes after exceeding a given level of activity. The change however is in a fixed constant amount.
  • Division’s salary’s Step Fixed nature is shown below:

No. of machine hours

No. of managers

Annual Salary per manager

Total Salaries

0 - 60000

1

$45,000

$45,000

60001 - 120000

2

$45,000

$90,000

120001 - 180000

3

$45,000

$135,000

  • Hence, the salaries stays fixed at $45000 annually, but after every 60000 hours, there is an increase of $45,000 (fixed amount).

This is a feature of Step Fixed Cost.

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