Question

Fixed cost per unit increases when —

• A. Production decreases
• B. Production increases
• C. Production remains same
• D. None of these

Hint:

Fixed cost per unit and production volume are inversely related — higher production means lower fixed cost per unit.

Answer 1

The Correct Option is A

Step 1: Understanding Fixed Cost.
Fixed costs are those business expenses that remain constant regardless of production levels — e.g., rent, salaries, and insurance.
While the total fixed cost does not change with output, the cost per unit changes inversely with production levels.
Step 2: Behavior of Fixed Cost per Unit.
When production increases, the total fixed cost is spread over more units, reducing the cost per unit.
Conversely, when production decreases, the total cost is spread over fewer units, increasing fixed cost per unit.
Step 3: Analysis of options.
- (1) Production decreases: Correct — fixed cost per unit rises.
- (2) Production increases: Incorrect — cost per unit falls.
- (3) Production remains same: Incorrect — cost per unit remains unchanged.
- (4) None of these: Incorrect.
Step 4: Conclusion.
Thus, fixed cost per unit increases when production decreases.