1. Classification of costs, merchandising sector. Home Entertainment Center (HEC) operates a large store in San Francisco. The store has both a video section and a music (compact disks and tapes) section.

Required

HEC reports revenues for the video section separately from the music section. Classify each cost item (AH) as follows:

Direct or indirect (D or l) costs with respect to the total number of videos sold.

Variable or fixed (V or F) costs with respect to how the total costs of the video section change as the total number of videos sold changes. (If in doubt, select on the basis of whether the total costs will change substantially if there is a large change in the total number of videos sold.)

You will have two answers (D or l; V or F) for each of the following items:

Cost Item

Annual retainer paid to a video distributor

Electricity costs of the HEC store (single bill covers entire store)

Costs of videos purchased for sale to customers

Subscription to Video Trends magazine

Leasing of computer software used for financial budgeting at the HEC store

Cost of popcorn provided free to all customers of the HEC store

Earthquake insurance policy for the HEC store H. Freight-in costs of videos purchased by HEC