Question

Consider the following two statements regarding cost behavior:

Assertion (A): Fixed costs per unit remain constant as production volume increases.

Reason (R): Fixed costs are not dependent on the level of production.

Which of the following is correct?

Options

• Both A and R are true, and R explains A.

• Both A and R are true, but R does not explain A.

• A is true, but R is false.

• A is false, but R is true.

Answer 1

A is false, but R is true.

Explanation:

The assertion is false because total fixed costs remain constant in aggregate, implying that fixed costs per unit decrease when production volume grows because the same total cost is divided across more units. The reason is true because total fixed expenditures, such as factory rent or insurance, are time-bound expenses that do not vary with manufacturing output.