How will fixed cost be affected if production increases by 20%?

Question

BlackTom AI · Accepted Answer

Fixed costs are expenses that do not change in total when production volume changes, so total fixed cost remains constant regardless of a 20% increase in output.

1. Relevant knowledge points and concepts
- Fixed cost: total cost that does not vary with production level (e.g., rent, insurance).
- Variable cost: cost that changes with production (e.g., materials).
- Average fixed cost (AFC): fixed cost per unit = Total fixed cost / Quantity produced.

2. Step-by-step reasoning
- Let total fixed cost = F (a constant).
- Let initial output = Q units.
- After a 20% increase, new output = 1.2 Q.
- Total fixed cost before = F. Total fixed cost after = F (fixed costs do not change with output).

3. Calculations and intermediate steps (showing unit effects)
- Initial average fixed cost = F / Q.
- New average fixed cost = F / (1.2 Q) = (1/1.2) * (F / Q) ≈ 0.8333 * (F / Q).
- Percentage change in average fixed cost = (0.8333 − 1) × 100% = −16.6667% (AFC falls by 16.67%).
- Note: These calculations show AFC per unit falls but total fixed cost F remains unchanged.

4. Why the correct answer is correct
- By definition, total fixed costs do not vary with production levels; increasing production by 20% does not change the total fixed cost. Only the fixed cost per unit (AFC) decreases.

5. Why the other options are incorrect
- "It will increase by more than 20%": incorrect because fixed costs do not rise with output.
- "It will decrease by 20%": incorrect; total fixed cost does not decrease. AFC decreases by 16.67%, not 20%.
- "It will increase by 20%": incorrect because fixed costs are not proportional to production.

6. Conclusion
Total fixed cost remains the same when production increases by 20%; therefore the correct answer is: It will remain the same.

How will fixed cost be affected if production increases by 20%?Single choice

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