As your sales levels increase you should expect
A Total fixed costs will increase
B Total fixed costs will decrease
C Total variable costs will increase
D Total variable costs will decrease
The correct answer and explanation is :
The correct answer is:
C) Total variable costs will increase
Explanation
When sales levels increase, total variable costs increase as well. This happens because variable costs are directly tied to production and sales volume. Variable costs include expenses such as raw materials, direct labor, shipping, and commissions—costs that fluctuate based on the number of goods or services produced and sold.
For example, if a company produces and sells more units, it will need more raw materials, more labor hours, and possibly more shipping and packaging costs. Since these costs increase with production, total variable costs rise as sales grow.
Why Not the Other Options?
- A) Total fixed costs will increase – Incorrect
Fixed costs remain constant regardless of sales levels. Expenses such as rent, salaries of permanent employees, and depreciation of equipment do not change whether sales increase or decrease. - B) Total fixed costs will decrease – Incorrect
Fixed costs do not decrease with higher sales. However, while the total amount remains unchanged, fixed costs per unit decrease as production rises, leading to lower costs per product. - D) Total variable costs will decrease – Incorrect
Total variable costs do not decrease with higher sales. Instead, they increase because more resources are needed to produce and sell additional units. However, variable cost per unit may stay the same or decrease due to economies of scale.
Conclusion
As sales levels rise, total variable costs increase because they are tied to production and sales volume. Businesses must manage these costs carefully to maintain profitability while expanding sales.