Answer to Question #203200 in Microeconomics for Mohammad Ahmad

Question

.     Suppose that you and your roommate have started a Bread delivery service on campus.

a.     List some of your fixed costs and describe why they are fixed. (5 Marks)

b.     List some of your variable costs and describe why they are variable.

Answer 1

a. Fixed costs; are expenses on items that are timed bound and remain constant for a period.

In Bread Delivery Service, our fixed costs include the following;

(i) Capital or investment cost; this will include the cost of delivery means i.e motorcycles.

(ii) Salaries - for workers who we have employed on a full-time basis, we will pay them a fixed amount (salary).

(iii) Interest expenses - we acquired one motorcycle on loan from a local bank and they carry a fixed interest rate payable every month (12%).

(iv) Rent - the space (warehouse or store) we rented to allow for a centralized dispatch point.

(v) Insurance - for the motorcycle and the store, payable at a fixed rate, quarterly.

 

b. Variable costs; are expenses that change (increase or reduce) with production (delivery) capacity and they will include the following (in our bread delivery firm);

(i) Packaging/repackaging - some loaves of bread require repackaging and the rates will depend on the number of loaves of bread packaged.

(ii) Wages - some staff is not employed on a full-time basis, their services will be needed depending on the availability of jobs.

(iii) Commissions - this is dependent on the amount of (marginal) sales if the salespersons exceed the required limit.

(iv) Fuel (gas) - this is dependent on the distance covered and/or the number of deliveries made, the longer the distance, the higher the fuel consumption hence higher cost and vice versa.