Final answer:
A decrease in activity within the relevant range in a flexible budget leads to a decrease in the total variable cost but does not change the variable cost per unit. The variable cost per unit stays constant as these costs are directly tied to each unit of production. Businesses may shut down if the price is below the AVC to minimize losses.
Step-by-step explanation:
When using a flexible budget, a decrease in activity within the relevant range does not increase the variable cost per unit. Instead, variable costs vary directly with the level of output. They are costs associated with the variable inputs, such as labor and raw materials, that change with the production level. For example, if a company produces fewer units of a product, it will require less labor and fewer raw materials. Consequently, the total variable costs would decrease. However, the unit cost for variable expenses remains constant because these costs are incurred on a per-unit basis. Therefore, if activity decreases within the relevant range, the total variable cost would decrease, but the variable cost per unit would remain unchanged.
If activities cease completely and the price falls below the average variable cost (AVC), it may be more sensible for a business to shut down temporarily as it would incur smaller losses by not producing at all, only losing its fixed costs, instead of losing both fixed and variable costs.