Within the relevant range, as the number of units produced increases:
A. the variable cost per unit remains the same.
B. fixed costs in total remain the same.
C. variable costs increase in total.
D. All of these.
The correct answer and explanation is :
The correct answer is:
D. All of these.
Explanation:
When analyzing cost behavior within the relevant range of production, the following principles apply:
- Variable Cost Per Unit Remains the Same
- Variable costs change in total based on production levels, but the cost per unit remains constant.
- For example, if direct materials cost $5 per unit, it will remain at $5 per unit regardless of whether 100 or 1,000 units are produced.
- Fixed Costs in Total Remain the Same
- Fixed costs (such as rent, salaries, and insurance) do not change in total within the relevant range.
- Even if production increases, the total fixed costs remain constant, though the fixed cost per unit decreases as more units are produced.
- For example, if rent is $10,000 per month, it remains at $10,000 whether 500 or 5,000 units are produced.
- Variable Costs Increase in Total
- Since variable costs depend on the number of units produced, total variable costs increase as production increases.
- If each unit requires $3 of raw materials, then for 1,000 units, total variable costs would be $3,000, while for 2,000 units, they would be $6,000.
Since all three statements are correct, the most appropriate answer is D. All of these.
