Fixed and variables

Question

Classify each of the following as fixed or variable costs and give a brief explanation for your classification. If you think the costs could be partially fixed and partially variable, give your reasoning.
1. Outsourced payroll services.
2. Leased offices. fixed
3. Company-owned building.
4. Payroll taxes. variable

Answer 1

A firm's fixed costs are the costs it incurs even if it does not produce anything.  Variable costs depend on how much product the company makes.  For example, if the company makes wooden furniture it has to buy enough wood to make each unit.  Its resource costs go up as its production goes up.

 

In the above list, leased offices and company building are fixed costs.

 

Payroll taxes are generally variable because as production goes up, the firm must hire more workers to make more product, so payroll taxes are generally seen as a variable cost. (If you really want to get tachnical, payroll taxes depend on the type of employees.  Payroll taxes on hourly workers are variable since hours vary with level of production.  Salaries for managers are usually fixed so the payroll taxes for these workers are also fixed.  Did the teacher get into that level of detail?)

 

 

Outsourced payroll srvices are variable if what the firm is paying for payroll services varies with the number of employees.  The problem does not tell us that, but it does say that a cost could be partially fixed and partially variable.  If a firm pays a fixed amount for payroll services regardless of how many employees there are, this could be fixxed, but if the cost depends upon the number of employees it would be variable, since the number of employees will fluctuate depending upon the level of production.  

 

I am not sure how much leeway the teacher wants to give with this question.  You could argue that as the firm increases production it will need more office space and perhaps even another manufacturing building. making building costs variable, but in the typical introductory micro problem buildings are usually seen as fixed costs unless you are told otherwise.