Question

As a hotel’s sales increases, hotel managers should generally expect:

A. an increase in total variable costs

B. an increase in total fixed costs

C. an increase in the fixed cost per unit

D. a decrease in variable costs per unit

Answer 1

The correct answer is A. an increase in total variable costs
Variable costs will increase with the increase in sales volume. As the name itself suggests variable costs vary with the level of sales.

Fixed costs on the other hand will remain same irrespective of the level of sales. Even if there are no sales fixed costs have to be incurred.

For example - During off season there are no guests at a hotel. Thus there is no revenue from them .However fixed costs such as rent has to be paid irrespective of the conditions.