Question

Last month, the Alexia Company experienced a sharp increase in its activity level; however, the company’s total fixed cost did not change. You have been asked to determine what cost changes the company can expect as a result of the change in activity level. What will you report?A. A decrease in average fixed cost per unit.

B. An increase in average fixed cost per unit.

C. An increase in variable cost per unit.

D. A decrease in variable cost per unit.

Answer 1

Answer:

A decrease in average fixed cost per unit.

Explanation:

Fixed assets are the expenses that remain constant in a financial period. They do not change regardless of production level. When productivity is low, profits tend to be low because the revenue generated cannot adequately cater to fixed cost and variable expenses.

A firm that has a high volume of production enjoys economies of scale. Its profitability increases as the average fixed cost tend to reduce. Fixed costs are usually spread among the number of units produced. Since fixed costs are constant, the average fixed cost will reduce when the total fixed costs are divided among a huge volume of production. Variable costs tend to increase or decrease proportionally with the production level.