Question

Classify the following into fixed cost and variable cost, giving a reason for your answer:

1. Expenses incurred on raw material
2. Interest on capital
3. Salaries to permanent employees.

Answer 1

Fixed cost	Variable cost
Interest on capital.	Expenses incurred on raw material
Salaries to permanent employees.

Reasons:

1. The cost of raw materials changes directly with the level of production. More production means more raw materials are required, and less production results in lower raw material costs.
2. The interest on capital remains constant regardless of the level of output or production. It is a fixed expense that the business incurs even if production changes.
3. Salaries to permanent employees are usually fixed, meaning they do not change with the level of output. These expenses remain the same even if production increases or decreases.