Question

11) Which of the following statements is TRUE about fixed and variable costs? a) Variable costs are constant in total and fixed costs are constant per unit. b) Both costs are constant when considered on a total basis. c) Both costs are constant when considered on a per unit basis. d) Fixed costs are constant in total and variable costs are constant per unit. Answer: (3 points) TEST 12) Marlowe Company currently leases a delivery truck from Burton Enterprises for a fee of $ 250 per month plus $.40 per mile. Management is evaluating the desirability of switching to a modern, fuel efficient truck, which can be leased from Goliath, Inc. for a fee of $.600 per month plus $.05 per mile. All operating costs and fuel are included in the rental fees. In general, a lease from: a) Goliath, Inc. is economically preferable to a lease from Burton Enterprises regardless of the monthly use. b) Burton Enterprises is economically preferable below 1,000 miles per month. c) Burton Enterprises is economically preferable to a lease from Goliath, Inc. regardless of the montly use. d) Burton Enterprises is economically preferable above 1000 miles per month.

Answer 1

1. Option (d) is correct

Fixed costs are constant in total and variable costs are constant per unit.

2. Option (b) is correct

Burton enterprises is economically preferable below 1000 miles per month.

As an example, first we will calculate cost at 900 miles and then we will calculate cost at 1100 miles.

Cost at 900 miles:

For Burton enterprises:

Cost = $250 + ($0.4 * 900) = $250 + $360 = $610

For Goliath Inc.:

Cost = $600 + ($.05 * 900) = $600 + $45 = $645

Cost at 1100 miles:

For Burton enterprises:

Cost = $250 + ($0.4 * 1100) = $250 + $440 = $690

For Goliath Inc.:

Cost = $600 + ($.05 * 1100) = $600 + $55 = $655

So, we can see that at 1100 miles, cost for Goliath Inc is lower. And, Burton's cost is low at 900 miles.