Which statement best describes fixed costs?

Which statement best describes fixed costs?

• A. Increase with production
• B. Decrease with production
• C. Remain unchanged with production
• D. Remain at the same level despite changes in production

Answer: (D)

Fixed costs are costs that do not change as the level of production varies, at least within the normal operating range. They must be paid whether you produce a lot or a little, like rent, salaries of permanent staff, or insurance. Because they don’t vary with output, the total fixed cost stays the same when production changes. The catch is that the cost per unit falls as production rises, since you’re spreading the same amount over more units. That’s why the statement describing fixed costs as remaining at the same level despite changes in production is the best description. The other ideas describe variable costs (which rise with output) or are less precise in conveying the same essential idea about independence from production level.

Fixed costs are costs that do not change as the level of production varies, at least within the normal operating range. They must be paid whether you produce a lot or a little, like rent, salaries of permanent staff, or insurance. Because they don’t vary with output, the total fixed cost stays the same when production changes. The catch is that the cost per unit falls as production rises, since you’re spreading the same amount over more units.

That’s why the statement describing fixed costs as remaining at the same level despite changes in production is the best description. The other ideas describe variable costs (which rise with output) or are less precise in conveying the same essential idea about independence from production level.