How are the two components of total cost related to variable and fixed costs? Use a clothing retailer to illustrate the costs.
What will be an ideal response?
Total cost is a combination of
- Cost of goods offered for sale: A clothing retailer, for example, must include in the selling price the cost of the clothing and related freight charges. The direct cost related to selling the product such as a salesperson's salary plus commissions or a sales promotion to sell the clothing are include dinthe cost of goods sold.
- Overhead costs applicable to the given product: The costs related to storage, office supplies, utilities, taxes, and other employee salaries and wages would be in the category.
Fixed costs remain constant no matter how many articles of clothing are sold. Examples would include cost of maintaining the storage, taxes and employee salaries that are paid hourly. Variable costs increase as more clothing is sold or decrease as less clothing is sold. Examples of variable costs are the cost of goods for the clothing and the sales commissions.
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