Total fixed costs remain constant as the level of activity changes.
The correct answer and explanation is :
Correct Answer: True
Explanation:
Total fixed costs remain constant as the level of activity changes because they are expenses that do not fluctuate with production or sales volume. These costs must be paid regardless of the company’s level of output. Examples include rent, salaries of administrative staff, depreciation of equipment, insurance, and property taxes.
Fixed costs are different from variable costs, which change directly with the level of production. For example, raw materials and direct labor costs increase as production rises and decrease when production falls. In contrast, fixed costs remain unchanged within a relevant range of production.
For instance, if a company pays $10,000 per month for factory rent, this cost remains the same whether the company produces 1,000 or 10,000 units. However, if the production level exceeds a certain threshold, additional costs (such as expanding the facility) may be incurred, which would create a new fixed cost structure.
Understanding fixed costs is essential for financial planning, pricing, and profitability analysis. Since these costs do not change with output, businesses must ensure that their revenue covers both fixed and variable costs to achieve profitability. Fixed costs also play a crucial role in determining the break-even point, which is the level of sales required to cover all costs and start generating profit.
In conclusion, total fixed costs remain constant within the relevant range of activity, making them predictable expenses that businesses must account for in their financial strategies.
