Question

When the activity level declines within the relevant range, what should happen with respect to the fixed cost per unit and variable cost per unit?
A. Neither the fixed nor variable cost per unit change
B. The variable cost per unit increases and the fixed cost per unit doesn't change
C. The fixed cost per unit increases and the variable cost per unit doesn't change
D. Both the fixed and variable cost per unit increase

Answer 1

Answer:

The correct answer is option C.

Explanation:

The fixed costs are the cost that does not vary with the level of output. It does not vary with the level of activity. The total fixed cost remains constant in the entire production process.

The fixed cost per unit is the ratio of total fixed cost and level of output. It decreases as the output level increases and rises with a decline in activity.

The variable cost is the cost that is incurred on the variable inputs used in the production process. It directly varies with the volume of activity. The total variable cost will increase with the increase of output as more variable inputs are employed.

The variable cost per unit is the cost incurred on each unit of output. It does not change with the level of activity unless there is a change in input prices.