If a company increases production without any increase in fixed costs:Group of answer choicesUnit total cost will increase.Fixed cost per unit will increase.Variable costs per unit will decrease.Gross margin per unit will increase when the units are sold.
Question
If a company increases production without any increase in fixed costs:Group of answer choicesUnit total cost will increase.Fixed cost per unit will increase.Variable costs per unit will decrease.Gross margin per unit will increase when the units are sold.
Solution
If a company increases production without any increase in fixed costs, the following steps can be observed:
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Determine the current fixed costs: Calculate the total fixed costs that the company incurs regardless of the level of production.
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Calculate the current unit total cost: Divide the total cost (including both fixed and variable costs) by the number of units produced to find the unit total cost.
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Analyze the impact of increased production: If the company increases production without any increase in fixed costs, it means that the fixed costs remain the same regardless of the level of production.
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Assess the effect on unit total cost: Since the fixed costs remain constant, the increase in production will spread the fixed costs over a larger number of units. As a result, the unit total cost will decrease. This is because the fixed costs are being distributed among more units, reducing the cost per unit.
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Evaluate the impact on variable costs: Variable costs are costs that vary with the level of production. In this scenario, if there is no increase in fixed costs, it implies that the variable costs per unit remain the same. Therefore, the variable costs per unit will not decrease.
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Consider the gross margin per unit: Gross margin is the difference between the selling price of a unit and its unit total cost. In this case, since the unit total cost decreases due to the spreading of fixed costs over more units, the gross margin per unit will increase when the units are sold. This is because the cost per unit is lower, resulting in a higher profit margin.
In summary, when a company increases production without any increase in fixed costs, the unit total cost will decrease, the variable costs per unit will remain the same, and the gross margin per unit will increase when the units are sold.
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