Answer :
If the offer is accepted, FLO will avoid all fixed costs while saving all variable costs. So the correct decision is to buy and save $ 20,000.
What are fixed and variable cost?
The total amount of control decides the fluctuation in the variable costs. unprocessed material, labor, and commissions are examples of variable expenses. In any case, the level of production of fixed expenses stay constant. The rental payments, insurances that we have, and interest payments are examples of fixed costs. By buying and saving $20,000 both the fixed and variable cost will be saved.
No matter whether there is company activity, every small business owner will have some fixed costs. Fixed costs are simpler to budget for since they remain constant from one fiscal year to the next. Because they are unrelated to operations or volume, they are also less within your control than variable costs. However, variable expenses fluctuate over a predetermined time period and are directly related to the company activity. These depend on how well the company performs and how many services it provides.
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FLO industries will save all variable costs and avoid all fixed expenditures if the offer is accepted. So purchasing and saving $20,000 is the right course of action.
What are fixed costs?
Fixed costs remain constant regardless of whether sales or production volumes rise or fall. This is so because they are not involved in the actual process of producing a good or providing a service. Fixed costs are therefore regarded as indirect costs.
Examples of fixed costs include:
- mortgage
- rent payments
- insurance premiums
- interest charges
Relationship between fixed and variable cost:
The overall degree of control determines how much the variable expenses will change. Variable costs include things like raw materials, labour, and commissions. The level of production of fixed expenses is constant in whatever situation. By buying and saving $20,000 both the fixed and variable costs will be saved.
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