Variable Cost Pattern in Business Activity

Steps:

• Examine the graph: It depicts a cost rising proportionally with business activity level, indicating a variable cost.
• Classify costs: Variable costs fluctuate directly with output or sales; fixed costs remain constant.
• Match to options: Identify which cost scales with activity, such as sales-related expenses.
• Eliminate fixed costs: Rule out those independent of activity volume.

Why B is correct:

• Commission on sales is a variable cost, calculated as a percentage of sales (e.g., 5% of revenue), increasing linearly with activity per the direct proportion formula: Total Commission = Rate × Sales Volume.

Why the others are wrong:

• A. Administrative salaries: Fixed cost, paid as a set amount regardless of activity.
• C. Depreciation of factory: Fixed cost, allocated over time or units but constant total annually.
• D. Office rent: Fixed cost, unchanging lease payment irrespective of business volume.

Final answer: B