Question

Costs per unit for fixed cost decrease as activity increases.

True or false?

Answer 1

Ans: True

Total fixed cost remains the same for any production level but when production unit starts increasing fixed cost per unit starts decreasing as same fixed cost starts spreading over more units.

For example, if production units is 2,000 and fixed cost is $6,000. So if we see fixed cost per unit would come to $3 ($6,000 / 2,000). But when production unit increses to 4,000 units and total fixed cost remaining the same (total fixed cost does not change with the change in level of production) then fixed cost per unit would be $1.50 ($6,000 / 4,000 unit).

We can see that fixed cost per unit came down from $3 to $1.50 as the production level increased from 2,000 units to 4,000 units. So the above given statement is true.