Question 12

C. Monthly lease on equipment

A fixed cost for the bakery is the monthly lease on equipment, as this expense remains constant regardless of the production level. It does not fluctuate with the amount of goods produced, making it a predictable cost that the bakery must pay each month.

A) Electricity costs that vary based on production level

Electricity costs are considered variable costs since they fluctuate based on how much the bakery produces. As production increases, so does the electricity usage, meaning this cost cannot be classified as fixed.

B) Cost of butter and eggs

The cost of butter and eggs is a variable cost because it changes depending on the quantity of baked goods produced. As more items are made, the bakery will need to purchase more ingredients, categorizing this expense as variable rather than fixed.

C) Monthly lease on equipment

The monthly lease on equipment is a fixed cost, as it remains stable regardless of the bakery's production levels. This expense does not vary with output, making it essential for calculating overall profitability.

D) Wages paid to hourly employees

Wages paid to hourly employees are variable costs since they depend on the number of hours worked, which can change based on production needs. This variability means these wages cannot be considered fixed costs.

Conclusion

The monthly lease on equipment is definitively the correct answer as it exemplifies a fixed cost that does not fluctuate with production levels. All other options represent variable costs, which vary based on the bakery's operational activity, underscoring the importance of understanding cost classifications for maintaining profitability.