Multiple Choice
Which of the following transactions would most likely increase a company's leverage ratio?
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9. Current Liabilities
Types of Liabilities
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Which of the following is an example of a committed fixed cost?
A
Advertising expenses
B
Direct materials cost
C
Depreciation on factory buildings
D
Sales commissions
Verified step by step guidance1
Understand the concept of committed fixed costs: These are costs that a company is obligated to pay over the long term and cannot be easily adjusted or eliminated. Examples include depreciation, lease payments, and salaries of permanent staff.
Analyze each option provided in the question: Advertising expenses, direct materials cost, depreciation on factory buildings, and sales commissions.
Evaluate advertising expenses: These are discretionary fixed costs, meaning they can be adjusted or eliminated based on management decisions, so they are not committed fixed costs.
Evaluate direct materials cost: This is a variable cost because it changes with production levels, so it is not a fixed cost at all.
Evaluate depreciation on factory buildings: Depreciation is a committed fixed cost because it represents the allocation of the cost of a long-term asset (factory buildings) over its useful life, and it cannot be easily adjusted or eliminated.
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