Discussion
Statement I: Fuel is a fixed cost for an airline.
Statement II: Fixed costs accrue whether the aircraft flies or not.
In the light of the above statements, choose the correct answer.
Answer: A
Correct answer: Statement I is incorrect but Statement II is correct
Statement I is incorrect. Fuel is the archetypal variable cost: it is consumed only when the aircraft flies, and in proportion to how far and how long.
Statement II is correct and supplies the test that shows why. Fixed costs accrue whether the aircraft flies or not - depreciation, insurance, financing charges, lease payments - and it is that independence from utilisation which defines them. Applying the test to fuel gives the opposite answer, so the two statements cannot both stand.
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