A company records the cost of a delivery vehicle's fuel that varies with distance travelled. How is this cost classified in terms of behaviour?
Answer and explanation
Correct answer: A. Variable cost
- Step 1: Cost behaviour describes how cost changes as activity changes.
- Step 2: Fuel cost rises in proportion to distance, so it is variable.
Answer
Variable cost.
Why not the others: Fixed cost: Fixed costs do not change with activity within the relevant range, but fuel use rises with mileage. Stepped fixed cost: A stepped cost rises in jumps at certain activity levels, not smoothly with each mile. Sunk cost: A sunk cost is one already incurred and irrelevant to decisions, which has nothing to do with how fuel cost behaves.
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