Question

If the volume of production is increased over the level planned, the cost per unit would be expected to: Multiple Choice Remain unchanged for fixed costs and increase for variable costs. Decrease for fixed costs and increase for variable costs. Increase for fixed costs and increase for variable costs. Decrease for fixed costs and remain unchanged for variable costs.

Answer 1

The correct answer is "Decrease for fixed costs and remain unchanged for variable costs".

Supporting explanations:

Fixed costs by an amount is always fixed but the fixed cost per unit is always varies due to changes in production volume and variable cost per unit is always fixed and the variable cost by an amount is always variable as it varies due to changes in production volume but the variable cost per unit is never changes due to changes in the production volume

This can be explained with the help of an example -

A company's maximum production capacity is 10,000 units in each month with total fixed costs of $20,000 and variable cost per unit is $3.

In this example, the fixed cost per unit is $2 ($20,000/10,000) and the variable cost per unit is $3.

Suppose the company is planning to increase the production by 5,000 units in each month then the expected production volume would be 15,000 units.

So the fixed cost per unit is $1.33 ($20,000/15,000) as the fixed cost per unit is decreased from $2 to $1.33 due to changes in the production volume from 10,000 units to 15,000 units but the variable cost per unit is not changed as it is still $3 per unit but the variable cost by amount based on 10,000 units is $30,000 ($3*10,000) and the new one is $45,000 ($3*15,000) but the variable cost per unit is fixed like $30,000/10,000 = $3 or $45,000/15,000 = $3.

Therefore, due to increase in the production volume, the fixed cost per unit decreases and variable cost per unit remains no change.