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Mug Shots operates a chain of coffee shops. The company pays rent of $15,000 per year for each shop. Supplies (napkins, bags and condiments) are purchased as needed. The managers of each shop are paid a salary of $2,500 per month and all other employees are paid on an hourly basis. The cost of rent relative to the number of customers in a particular shop and relative to the number of customers in the entire chain of shops is which kind of cost, respectively?

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Answer: Fixed cost

Explanation: Every business entity bears certain cost for operating in the market and these cost can be divided into two parts as follows :-

Variable cost : These are the costs that changes with the level of output in the business.

Fixed cost : It can be defined as those expenses of business which remains independent of the level of output.

In the above example mug shots have to bear the same cost of rent irrespective of the number of customers whereas other cost as supplies like napkins will increase as more customers come to the shop. Thus, rent is a fixed cost.

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