Yet another costing question

Can someone help me with this i understand what its askng but not sure how to answer

if selling prices and variable costs remain constant at differing levels of activity explane why unit costs will tend to fall as activity increase.

Thanks


Vic

Comments

  • mikes
    mikes Registered Posts: 254
    Hi Vic,

    This is due to the fixed costs being spread over a higher number of units, which remain constant, regardless the level of output. Within reason ie they may move up once the threashold is reached, in terms of stepped costs for items such as rent or machinery if expansion is required.

    Hope this will help.

    Regards.

    Michael.
  • Bookworm55
    Bookworm55 Registered Posts: 479
    explane why unit costs will tend to fall as activity increase.

    As production increases, the total variable cost will increase even though the variable cost per unit will remain constant.

    However, the total fixed cost will remain constant regardless of the level of activity. As production increases, the fixed costs will be shared over a greater number of units. Although the total fixed costs will be the same, they will be spread over more units, lowering the fixed cost per unit.

    When added together, the total unit costs will tend to decrease as production increases. This is because it combines the variable cost per unit (which remains constant) with the fixed cost per unit (which will decrease)

    Does that help?
  • A-Vic
    A-Vic Registered Posts: 6,970
    thats great thanks peeps it was what i thought but its just the wording that got me

    :001_smile:
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