Indicate true and false for each question below? A. If activity increases by 10 percent, total...

Indicate true and false for each question below?

A. If activity increases by 10 percent, total fixed cost will increase by 10 percent

B. If activity increases by 10 percent, per unit variable cost will decrease by 10 percent

C. If activity increases by 10 percent, per unir fixed cost will increase by 10 percent

D. If activity increases by 10 percent, total variable cost will increase by 10 percent.

Solutions

Expert Solution

(A) False.

Total fixed cost remains fixed irrespective of the level of activity. It does not change whether the activity is increased or decreased. Even if there is no activity, fixed costs have to be incurred. Fixed costs remain constant in total but they vary per unit. Example of fixed cost is rent. Whether we increase or decrease the activity, fixed costs have to be incurred and will be same, but the cost per unit will decrease (or increase respectively)

(B) False

Variable costs changes proportionally with the activity. Variable cost change in total, but they remain constant / same per unit.

(C) False

As explained in (A) above, as activity increases, total fixed cost remains same but per unit fixed cost decreases.

(D) True

As explained in (B) above, as activity increases total variable cost will increase but per unit variable cost will remain same. So, if activity increase by 10%, total variable cost will also increase by 10%.

ekkarill92 answered 1 year ago

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