IB Business Management SL 3.3.1 Types of cost Question Bank

Suparman Fish ( SF )
Gepa Suparman owns and operates four fishing boats in Indonesia. There is a growing demand for canned (tinned) food, including cans of fish. Gepa wants to enter the secondary sector by opening a small factory producing cans of fish.
Gepa's business will be called Suparman Fish ( S F ) and will be a private limited company. Gepa will own all of the shares. The factory will be located in a village three miles from the harbour. Because unemployment is high in the village, Gepa should easily find workers for the new factory. In addition to the manager's salary, workers' wages, and the cost of fish, supplies, and cans, S F will have the semi-variable cost of electricity.
Gepa has prepared a four-month cash-flow forecast based on the following information:
- opening balance month 1: $\$15000$.
- month 1 : sales revenue of $\$1000,$increasing by 20 % per month.
- manager's salary: $\$300$per month.
- workers' wages: $\$175$per worker per month.

- variable costs (fish, supplies, and cans) are equal to 40 % of sales revenue.
- semi-variable cost of electricity: fixed cost of $\$100$per month, plus a variable cost of $\$0.10$ per kilowatt hour (kwh). Month 1 usage: 100 kwh , increasing by 10 % each month.

Although S F would create several jobs in the village, many residents are not happy about the new factory. The new factory would use chemicals, which cause pollution. Residents are concerned about the unpleasant smells from the factory. A representative from the local employment office is concerned whether Gepa's factory will provide a safe working environment.

Explain why electricity is a semi-variable cost for S F.