Praxis II Citizenship

Answer: B - An executive’s performance incentive is not a fixed cost. Fixed costs are independent cost components that a business must pay regardless of their production rate or earnings. If a factory yields 100 widgets in January and no widgets in February, the company’s lease rates for the factory and the delivery truck will stay the same because the rates are not pro-rated according to use or company success. Conversely, variable rates can fluctuate depending on production and revenue. The company will have to spend less money on natural resources in February if their production stops. Likewise, if an employee receives a certain incentive payment for achieving a production or sales goal, that goal has to be met before the incentive is paid, making it a dependent cost. Personal budgets also have fixed and variable costs (of living rather than production). For example, a person’s rent is a fixed cost of living because it stays the same each month regardless of how many nights the renter spend at home. However, food is a variable cost because if a person eats less food, his food costs will likewise decline.