Question

An ice-cream street vendor operates out of a small truck. He considers replacing the truck with a larger one but decides not to. Apply the appropriate label to each cost.

annual fee for operating permit fixed cost
increased profits that would have been made possible by a larger truck opportunity cost
cost of buying ice cream from wholesaler each week variable cost
purchase cost of current truck (paid off last year) sunk cost

Answer 1

Fixed cost is the annual fee for the operating permit, opportunity cost is the foregone increased profits from not upgrading the truck, variable cost is the weekly purchase of ice cream, and sunk cost is the purchase cost of the current truck.

Step-by-step explanation:

When discussing the costs for a street vendor operating out of a truck, we categorize expenses based on how they relate to business operations. The annual fee for an operating permit does not vary with sales or production levels, making it a fixed cost. Should the vendor opt against upgrading to a larger truck, the foregone additional income that could have been earned is known as the opportunity cost. Weekly purchases of ice cream from a wholesaler, which can fluctuate based on the amount needed, represent a variable cost. Lastly, the purchase cost of the current truck, which is already paid off, is considered a sunk cost, as it is a historical expense that cannot be recovered.