Select the correct statement regarding fixed costs.

Select the correct statement regarding fixed costs.

a. They do not change, because fixed costs should be ignored in decision making.

b. The fixed cost per unit increases when volume increases.

c. The fixed cost per unit decreases when volume increases.

d. The fixed cost per unit does not change when volume decreases.

Answer: c. The fixed cost per unit decreases when volume increases.

They are costs that are incurred in the production or delivering of a product or service and do not nit increase in value as production or service delivery is increased or decreased. It is important to explain that fixed costs are those that do not change with the level of production or sales and may include rent, insurance, and wages of employees who would be paid whether or not the business were active. Overhead cost doesn’t change with variation in production volume and as such it is spread out over many units of production. This yields a direct relation between a cost that is non-variable and the level of production, and a direct relation where the per-unit fixed cost is an inverse function of the level of production. This is known as ‘the spreading of fixed cost’ or ‘ economies of scale ’ for instance if a company has a fixed cost of one hundred thousand dollars, and they are producing 10000units of production then the firm will spread the one hundred thousand dollar or allocate it to the number of units of production to arrive at what every unit of production will cost which in this case about 10$ cents. Total fixed costs are cost that do not vary with the number of units and in this case are $100, 000 If the company produced 20, 000 units the total fixed cost of production is divided by the number of units produced and hence fixed cost per unit will be $5.