Question

If a company decreases the variable expense per unit while increasing the total fixed expenses, the total expense line relative to its previous position will: Multiple Choice shift downward and have a steeper slope. shift downward and have a flatter slope. shift upward and have a flatter slope. shift upward and have a steeper slope.

Answer 1

Answer:

The answer is: shift upward and have a flatter slope.

Explanation:

I will explain this using the following example:

The total costs of a company are calculated using the following formula:

• total costs = fixed costs + variable costs

Let's say the costs for producing 100 chairs is $2,000 fixed overhead and 15$ per chair (includes materials and direct labor). The total cost for producing those 100 chairs will be $2,000 + $1,500 = $3,500.

But the company buys new machinery and is able to lower the variable costs to $10 per chair but its fixed overhead increases to $2,500. The cost of producing the 100 chairs will be the same, $3,500, but its fixed will now be higher (the total expense line will shift upward) an the variable costs are lower now (the slope of the expense line will be flatter).

A decrease in the variable costs will favor larger production outputs, favoring economies of scale, even though fixed costs might also increase.