Question

For the past 8 months, Jinan Corporation has experienced a steady increase in its cost per unit even though total costs have remained stable. This cost per unit increase may be due

Answer 1

Answer:

a decrease in the total amount of units produced while fixed costs remain the same (that is why they are called fixed).

Explanation:

For example, company A produces 1,000 units with a total variable cost per unit of $10 plus $10,000 total fixed costs. Company A's total costs = $20,000

If company A's production level decreases to 950 units, their total costs = $19,500. Therefore a 5% decrease in production units only decreases fixed costs by 2.5%.

Company A's total costs were evenly split between variable and fixed costs, but sometimes either variable or fixed costs are proportionally larger. If the fixed costs of company A had been 67% of total costs instead of 50%, the 5% decrease in units produced would have reduced total costs by only 1.7%.

So the larger the proportion of fixed costs, a change in the number of units produced will have a smaller impact in the total costs of the company.