Question

Last year, wesson company sold 10,000 units of its only product. if sales increase by 12% in the current year, how will unit variable cost and unit fixed cost be affected?

Answer 1

Variable cost is directly proportional to production output while fixed cost is constant regardless of production level. For Wesson company, the 12 % increase in sales can only affect the unit variable cost. Its relationship can be seen in the variable cost ratio. Variable cost ratio compares the variable cost to total revenue. Variable cost ratio is one factor  that determines profitability.