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In the short run, which one of the following is a variable cost?
AContractual rent on the factory building
BInterest on capital borrowed earlier
CCost of raw materials used in output
DAnnual property tax on the premises
Answer & Solution
Correct answer: C. Cost of raw materials used in output
1. Variable costs change with the level of output; fixed costs do not.
2. Raw material usage rises and falls directly with output produced, so it is variable.
3. Therefore the cost of raw materials is the variable cost here.
4. Rent (A), interest on past borrowing (B) and property tax (D) are incurred regardless of output, so they are fixed. Hence raw materials.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 3 Unit II "Theory of Cost", p.3_
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