How is a fixed cost defined?

Question

BlackTom AI · Accepted Answer

A fixed cost remains constant in total regardless of changes in the level of activity (within the relevant range).

1. Relevant knowledge points and concepts
- Fixed cost: a cost that does not change in total with short-term changes in activity or production volume (e.g., rent, salaried wages, insurance).
- Variable cost: changes in total with activity (e.g., direct materials, direct labor paid per unit).
- Per-unit behavior: total fixed cost is constant, but fixed cost per unit decreases as output increases (because the same total is spread over more units).
- Relevant range: the span of activity over which the fixed-cost assumption holds.

2. Step-by-step reasoning process
- Identify the behaviour required by the definition: does total cost remain unchanged as activity changes? If yes, it is fixed in total.
- Compare options: choose the description that states constancy irrespective of activity level.

3. Numerical illustration (intermediate steps shown)
- Suppose monthly rent = $1,000 (a fixed cost).
- If production = 100 units, fixed cost per unit = $1,000 / 100 = $10 per unit.
- If production = 200 units, fixed cost per unit = $1,000 / 200 = $5 per unit.
- Total fixed cost remains $1,000 in both cases even though per-unit cost changed.

4. Why the correct answer is correct
- Option A directly states that the cost “stays the same irrespective of changes in the level of activity,” which matches the definition and the numerical illustration: total fixed cost does not vary with activity within the relevant range.

5. Why the other options are incorrect
- Option B: describes a variable cost (changes with activity), not a fixed cost.
- Option C: claims the cost "stays the same per unit as the number of units changes." That describes variable cost per unit (which is constant), but fixed costs are constant in total, not per unit—the per-unit fixed cost actually changes inversely with output.
- Option D: “a fixed proportion of profit” is unrelated to the definition of fixed cost; fixed costs do not depend on profit.

6. Conclusion
- The correct answer is: "A cost that stays the same irrespective of changes in the level of activity." This matches the provided answer.

How is a fixed cost defined?Single choice

Similar Questions

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