Question

Which of the following is not a fixed cost?

• A. Insurance premium
• B. Interest
• C. Cost of raw materials
• D. Factory rent

Hint:

Fixed costs do not change with production output, whereas variable costs fluctuate with the level of production.

Answer 1

The Correct Option is C

Step 1: Understanding Fixed Costs:
Fixed costs are costs that do not change with the level of production or output. These costs are incurred even when production is zero. Common examples include insurance premiums and factory rent. Step 2: Analyzing Options:
- Insurance premium: A fixed cost, as it is paid regularly regardless of the level of production.
- Interest: Generally a fixed cost, as it is paid on borrowed capital and remains constant over time.
- Cost of raw materials: This is a variable cost because it increases or decreases with production levels. More output means more raw materials are needed.
- Factory rent: A fixed cost, as it is paid regardless of the amount of production.
Step 3: Conclusion:
The cost of raw materials is a variable cost, not a fixed cost, making option (C) the correct answer.