Final answer:
In business, costs can be classified as fixed or variable. When there is a decrease in activity, variable costs will decrease while fixed costs remain the same.
Step-by-step explanation:
In business, costs can be classified as either fixed costs or variable costs. Fixed costs are expenses that do not change with the level of activity, such as rent, salaries, and insurance. Variable costs, on the other hand, are expenses that do change with the level of activity, such as raw materials and direct labor.
When there is a decrease in activity, certain costs will change. Specifically, the variable costs will decrease because there will be a lower demand for raw materials and less need for direct labor. However, the fixed costs will remain the same because they do not depend on the level of activity.
For example, let's say there is a manufacturing plant that produces 100 units of a product. The direct labor cost for each unit is $10, resulting in a total variable cost of $1,000. If the plant decreases its production to 50 units, the direct labor cost will decrease to $500, reducing the total variable cost. However, the rent for the plant, which is a fixed cost, will remain the same.