Question

Which of the following is most likely to be a variable cost? (LO1) a) Real estate taxes b) Rental payments of IBM equipment c) Interest on bonded indebtedness d) Fuel and power payments

Short answer

The most likely variable cost is d) Fuel and power payments, as it changes in proportion to the level of activity or production within the company.

Step-by-step solution

Identify the costs that are fixed or variable in nature

List the given costs and analyze if they are fixed or variable costs. a) Real estate taxes: This cost does not change based on the activity or production level. Hence, it is a fixed cost. b) Rental payments of IBM equipment: This cost might change depending on the number of equipment rented or the level of usage. It could be a variable cost. c) Interest on bonded indebtedness: This cost is determined by the amount of debt issued and its interest rate. It does not change with the activity or production level. Thus, it is a fixed cost. d) Fuel and power payments: These costs usually depend on the energy consumption of the activities or production level within the company. As the activity level increases, the fuel and power consumption is also likely to increase. Hence, this is a variable cost.

Choose the variable cost from the options

From the analysis in step one, we notice that the fuel and power payment (option d) is the cost that is most likely to vary with the production level or activity within the company. The other costs are more fixed in nature as they don't change with the activity level. Therefore, the answer is: d) Fuel and power payments.