Caleb Construction (CC) incurs supervisor salaries expense in the construction o

Question

Caleb Construction (CC) incurs supervisor salaries expense in the construction of homes. If CC manufactures 100 homes in a year, fixed supervisor salaries will be $400,000. With the current construction supervisors, CC's productive capacity is 150 homes in a year. However, if CC is contracts to build more than 150 homes per year, it will need to hire additional supervisors, which are hired as full-time rather than temporary employees. CC's productive capacity would then become 200 homes per year, and salaries expense would increase to $470,000.

How would CC’s salaries expense be properly classified?

Explanation / Answer

A semi-variable cost is the one which has element of fixed cost and variable cost both. Costs are fixed for a set level of production or consumption, and become variable after this production level is exceeded. Here also, CC has fixed cost till $ 400,000 which increases gradually as the number of houses increases. Thus salaries expenses shall be classified as semi variable.

Hope this helps. Thanks

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