Fixed costs
a. remain constant as a total within a relevant range.
b. increase as a total as activity increases.
c. decrease as a total as activity decreases.
d. are constant per unit as activity increases or decreases.
The correct answer and explanation is :
Correct Answer:
a. Remain constant as a total within a relevant range.
Explanation:
Fixed costs are expenses that do not change in total within a given range of production or business activity. These costs remain unchanged regardless of the level of output or sales volume, as long as the business operates within its relevant range—the level of activity where fixed costs are expected to remain stable.
Understanding Fixed Costs:
Fixed costs include expenses such as rent, salaries of permanent staff, depreciation, and insurance. Whether a company produces 1 unit or 10,000 units, these costs do not fluctuate in total within the relevant range. For example, if a company rents a factory for $10,000 per month, this cost remains the same whether the company produces 500 or 5,000 units.
Why the Other Options Are Incorrect:
- b. Increase as a total as activity increases: This is false because fixed costs remain constant in total. They do not increase with higher production.
- c. Decrease as a total as activity decreases: Also incorrect—fixed costs do not decrease just because fewer units are produced. They only change if the business moves outside its relevant range, such as by downsizing or shutting down operations.
- d. Are constant per unit as activity increases or decreases: This is misleading because the per-unit fixed cost changes with activity level. If more units are produced, the fixed cost per unit decreases (i.e., spreading the cost over more units). Conversely, if production decreases, the fixed cost per unit increases.
Thus, the correct answer is (a) remain constant as a total within a relevant range.
