Question

Acme Inc. manufactures widgets. This year was a great year with a increase in both sales and production volume. In addition, the cost per unit dropped significantly from the prior year. These facts (probably) imply that:

there are significant fixed costs in Acme's cost structure.

None of these answers are correct

cost of goods manufactured is relatively small in the current period.

variable costs are a large percentage of cost of goods sold.

total variable costs decreased in the current period

Answer 1

As the question suggests that the company had a great year with increase in sales and production. It also had its Cost per unit dropped significantly from last year.

Firstly why this would happen?

This is due to the concept of Learning Curve

Learning curves are also known as experience curve, cost curves, efficiency curves and productivity curves. These curves help demonstrate the cost per unit of output decreases over time with the increase in experience of the workforce.

As the company maximised its production it was able to reduce its Total Variable Cost in the current period.

Fixed Costs will have no implications as these costs will be fixed irrespective of the units produced.

Variable costs are a large percentage of cost of goods sold would also be incorrect as company has increased its sales thus Variable Costs will also be more.

Therefore the correct answer would be total variable costs decreased in the current period.