An example of a committed fixed cost is:
a training program for salespersons.
executive travel expenses.
property taxes on the factory building.
new product research and development.
The correct answer and explanation is :
The correct answer is:
Property taxes on the factory building.
Explanation:
A committed fixed cost is a long-term expense that a company incurs regardless of its production levels or sales volume. These costs arise from past decisions and are essential for maintaining the company’s operational capacity. They are difficult to reduce in the short term without significantly affecting the business.
Why Property Taxes on the Factory Building?
Property taxes are a perfect example of a committed fixed cost because:
- They are legally mandated – A company must pay property taxes on owned facilities, regardless of whether the factory is operating at full capacity or sitting idle.
- They do not change with production levels – Unlike variable costs (such as raw materials), property taxes remain the same even if the company produces zero or maximum units.
- They are long-term obligations – These costs persist over time and cannot be eliminated easily without selling the property or shutting down operations.
Why the Other Options Are Incorrect:
- Training Program for Salespersons – This is a discretionary fixed cost, not a committed one. The company can choose to cancel or reduce training programs without severely affecting long-term operations.
- Executive Travel Expenses – These are also discretionary costs. The company can control or eliminate travel budgets when necessary, making them flexible rather than committed.
- New Product Research and Development (R&D) – R&D expenses are optional investments in innovation and growth. While important, they are not mandatory and can be adjusted based on financial conditions.
Thus, property taxes on the factory building best represent a committed fixed cost, as they are unavoidable and necessary for the company’s ongoing existence.