Question

Cobblestone Tours charges participants $20 each to go on a “Savannah Haunted Pub Crawl” tour. Each tour can accommodate up to 30 people. The tour company pays the city of Savannah $500 per year for the license to operate a tour company. They pay their tour guide, Rhett, a wage of $60 per tour conducted. And each tour participant gets a lovely, complementary, commemorative plastic cup with custom printing, which Cobblestone Tours purchases from the printer for $0.50 each. For each of the three costs mentioned above, discuss if they are fixed or variable and explain.

The $500 license fee paid to the city:

The $0.50 per cup amount paid to the printer:

The $60 paid to Rhett, the tour guide (warning: this is a tricky one and might not easily fit into either category):

Answer 1

Solution:-

Given that

Fixed Cost:

Cost that does not change with change in output is called fixed cost.

Variable cost: cost that change with change in output is known as variable cost.

i)

The $500 license fee paid to the city:

This is fixed cost. It does not change whether participants come for tour or not.
ii)

The $0.50 per cup amount paid to the printer:

This is variable cost. It increases as number of participants increase. Zero participants zero cost.
iii)

The $60 paid to Rhett, the tour guide

This is also a variable cost. Rhett is paid hourly. If participants do not come, he would be paid nothing.

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