Question

Select the correct statement regarding fixed costs. Multiple Choice

Answer 1

Answer:

The fixed cost per unit decreases when volume increases.

Explanation:

As the name implies the fixed cost are a constant value.

They total cost do not change by the activity of the business

Using common sense we can already notice that if do not change with volume at the total level, it is better to produce as much as possible to generate a better use of the fixed cost.

Now moving to the unit cost, this is calculate by dividing the fixed cost by the volume

$\frac{Fixed Cost}{Volume} = Unit Fixed Cost$

As the volume increase the quotient decrease because, the same number is divided by a bigger figure.

So the unit fixed cost are smaller.

EXAMPLE

If a factory cost 1,000,000 per month

and only produce 1 chair, then the cost of that chair was 1,000,000

while if the production is 500,000 chairs the cost is 2 per chair.