Question

With respect to total fixed costs, which of the following statements is true?

1) Total fixed costs remain constant regardless of the level of production.
2) Total fixed costs increase as the level of production increases.
3) Total fixed costs decrease as the level of production increases.
4) Total fixed costs vary randomly with the level of production.

Answer 1

Total fixed costs remain constant regardless of production levels, whereas variable costs change depending on the quantity produced. Fixed costs are considered sunk costs, which are unchanged and not relevant to future decisions.

Step-by-step explanation:

With respect to total fixed costs, the correct statement among the given options is that total fixed costs remain constant regardless of the level of production. This is because fixed costs are expenses that do not change with the amount of goods produced. For example, if a company has a fixed cost of $160, this cost will remain the same whether the company produces one unit or one thousand units.

The variable costs, on the other hand, change in direct proportion to the level of production. As more products are made, variable costs increase since these are costs incurred directly as a result of the production process.

Therefore, when considering the relationship between fixed costs and production levels, fixed costs are viewed as sunk costs which remain constant and should not influence future production or pricing decisions. Given these considerations, the correct answer is statement 1) Total fixed costs remain constant regardless of the level of production.