Question

Which statement describes a fixed cost?

The unit cost varies directly to the activity level.

The unit costs stay the same at every activity level.

It varies in total at every level of activity.

When activity declines, its cost per unit increases.

Answer 1

A fixed cost remains constant regardless of production levels, such as rent for a factory. Unlike variable costs, fixed costs do not fluctuate with activity but can lead to a higher per unit cost if production decreases. 3) It varies in total at every level of activity.

Step-by-step explanation:

The statement that describes a fixed cost is: 'The unit costs stay the same at every activity level.' This means that no matter how much a company produces, its fixed costs, such as the rent on a factory or machinery used in production, remain constant. These costs are not affected by the level of production in the short run. Variable costs, on the other hand, fluctuate with production levels and can include materials and labor.

Fixed costs are important to understand because they are sunk costs and don't influence economic decisions about future production or pricing despite their lack of correlation with output levels. As activity levels rise, fixed costs remain the same, resulting in a decrease in cost per unit. Conversely, if activity declines, the cost per unit of these fixed costs increases. This concept is essential for businesses in budgeting and financial planning.