Question

Expense A is a fixed cost; expense B is a variable cost. During the current year the activity level has increased, but is still within the relevant range. In terms of cost per unit of activity, we would expect that

Answer 1

b) Expense B has decreased.

Step-by-step explanation:

a) Expense A has remained unchanged.

b) Expense B has decreased.

c) Expense A has decreased.

d) Expense B has increased.

Fixed costs are costs that do not vary with output. e,g, rent, mortgage payments

If production is zero or if production is a million, Mortgage payments do not change - it remains the same no matter the level of output.

Hourly wage costs and payments for production inputs are variable costs

Variable costs are costs that vary with production

If a producer decides not to produce any output, there would be no need to hire labour and thus no need to pay hourly wages.

Let assume fixed cost is 100 pounds when output is 10 units

Fixed cost per unit = fixed cost / output

100 / 10 = 10

Fixed cost per output when output increases to 20 units is

100 / 20 = 5

fixed cost per unit falls as output increases