Question

Dizzy Amusement Park is open from 8:00 am till midnight every day of the year. Dizzy charges its patrons a daily entrance fee of $30 per person which gives them unlimited access to all of the park's 35 rides.

Dizzy gives out a free T-shirt to every 100th customer entering the park. The cost of this T-shirt would best be described as a:


A. fixed cost
B. mixed cost
C. step-variable cost
D. true variable cost

Answer 1

Answer:

C. Step variable cost

Explanation:

Fixed costs are those costs which are incurred anyways irrespective of the level of operation of a business or the volume of activity. For example rent of factory is a fixed cost which has to be incurred regardless of the production level.

Variable costs are those costs which vary with the level of production. e.g labor cost.

In this case, a T- shirt is given to every 100th customer.  This kind of cost is step cost at the level of 100th customer. The number of T-shirts in a day would depend upon the no of patrons arriving each day i.e variable.

Thus, this is the case of a step variable cost which is incurred at discrete point i.e every 100th customer.

Answer 2

Answer:

Step Variable cost

Explanation:

This cost remains the same over a period of time or until certain threshold is attained. It is subjected to review periodically if the manager decides. While a true variable cost varies in direct proportion to production activities , step variable does not.

Another example of step variable cost is compensation given out to either employees when a set target is achieved.