Jack received $560 from his grandmother. He decided to shop for a gift for himself and spent $7 for his bus fares. Jack decided to purchase a new bike for $560. For the same amount, he could have purchased a model GH-200 aeroplane that he adored and that would have provided $120 more benefit than the new bike. Jack was also considering a trip to Melbourne to visit his aunt, although he was not too keen about it. He was also interested in pursuing a course leading to a private pilot's licence, although he is a bit scared of heights. One month later, the price of the bike Jack purchased from Hut Ltd had gone down by $100. The bike had cost Hut Ltd $260 of labour and $170 of plant and equipment. The variable and fixed costs for producing the bike are:
A) $560 and $260 respectively.
B) $260 and $170 respectively.
C) $170 and $560 respectively.
D) $170 and $260 respectively.

Question

Quizplus · Accepted Answer

Option A can be eliminated since it states that the variable cost of producing the bike is $560 which is incorrect, as the variable cost is $300 ($260 labor + $40 material cost).

Option C can be eliminated since it states that the fixed cost of production is $560 which is incorrect, as fixed costs are associated with plant and equipment and are $170.

Option D can be eliminated since it states that the variable cost is $170 which is incorrect, as it is the fixed cost of production associated with plant and equipment.

Therefore, option B is the correct choice, where variable cost = $260 and fixed cost = $170.

As per the given information, Jack spent $7 on bus fares and bought a bike for $560. He could have bought a model GH-200 aeroplane for the same amount, which would have provided $120 more benefit than the new bike. However, it is not mentioned what the exact cost and benefits of the aeroplane are, and hence we cannot determine if it is a better choice than the bike or not.

Jack was also considering a trip to Melbourne and pursuing a private pilot's license. However, it is not mentioned how much these choices would cost, and hence we cannot determine if they are better choices than buying a bike.

One month later, the price of the bike Jack purchased had gone down by $100. It cost Hut Ltd -$170 (plant and equipment) - $260 (labor) - $40 (material) = -$470 to produce the bike. This means that they sold the bike to Jack for a profit of $560 - $470 = $90.

Jack Received $560 from His Grandmother