If the activity level increases 25% and a specific cost increases from $40,000 to $50,000, this cost would be classified as a fixed cost.
Increase in activity level = 25%
Specific cost increases from $40,000 to $50,000
Increase in cost = $10,000
Increase in cost (%) = Increase in cost/Beginning cost
= 10,000/40,000
= 25%
Since due to a 25% Increase in activity level, specific cost also increases by 25%, hence the cost must be a variable cost.
Variable cost varies in the same proportion to output. Within the given range of activity, fixed cost remains the same.
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