Multiple Choice QuestionWhich of the following is the correct statement about fixed costs?Multiple choice question.The fixed cost per unit will decrease when volume increases.The fixed cost per unit does not change when volume changes.The fixed cost per unit will decrease when volume decreases.The fixed cost per unit will increase when volume increases.
Question
Multiple Choice QuestionWhich of the following is the correct statement about fixed costs?Multiple choice question.The fixed cost per unit will decrease when volume increases.The fixed cost per unit does not change when volume changes.The fixed cost per unit will decrease when volume decreases.The fixed cost per unit will increase when volume increases.
Solution
The correct statement about fixed costs is: "The fixed cost per unit will decrease when volume increases."
Here's why:
Fixed costs are costs that do not change with the level of output. Examples include rent, salaries, and insurance. These costs are incurred regardless of whether the business is producing any goods or services.
When we talk about the fixed cost per unit, we're dividing the total fixed costs by the number of units produced. So, if a business increases its volume of output (i.e., produces more units), the fixed cost per unit will decrease. This is because the same total amount of fixed costs is being spread over a larger number of units.
On the other hand, if the volume decreases (i.e., fewer units are produced), the fixed cost per unit will increase. This is because the same total amount of fixed costs is being spread over fewer units.
Therefore, the statement "The fixed cost per unit will decrease when volume increases" is correct.
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