Question

As the Corner Coffee Shop becomes more popular and sells more coffee, which of the following cost is more likely to increase?

(multiple choice):

Employee wages because they are average costs.

Spending on coffee beans and sugar because they are variable costs.

Insurance premiums because they are fixed costs.

Answer 1

Spending on coffee beans and sugar because they are variable costs

Variable cost refers to the cost which vary directly with the level of output. Variable cost increases with an increase in level of output.

To sell more coffee, corner coffee shop has to increase its output of coffee. Coffee beans and sugar are required to make coffee. So to sell more coffee, more sugar beans and sugar are required. Therefore, when corner coffee shop becomes more popular and sell more coffee then spending on coffee beans will increase because they are variable costs.