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the note for jun2016 exam’s exercise:
A company rents a factory that will allow production of up to 10,000 units per month. If company considering a new order that would push production 15,000 units,rental cost will be?? why the answer is stepped fixed??
Stepped costs are where there are sudden increases in a cost.
I assume the question said that up to output of 10,000 pm rent was constant, but when production went up to 15,000 an additional factory had to be rented and there would be an immediate additional cost.
The rental cost is a fixed cost for only 10,000 units. At 10,000 units, the rental cost will be constant. When the company want to push production to 15,000 units, definitely they would rent another place so the rental cost increase. After that, the rental cost will be constant again until they want to rent additional place for another additional production units made.
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