Question

which of the following statements are true?

1. if the activity level increases, then one would expect the fixed cost per unit to increase as well.
2. a fixed cost is a cost whose cost per unit varies as the activity level rises and falls.
3. a decrease in production will ordinarily result in a decrease in fixed production costs per unit.

multiple choice

statements 1 and 3 are true.
only statement 2 is true.
statements 1 and 2 are true.
only statement 3 is true.

Explanation:

Analyze Statement 1

As activity level increases, total fixed cost remains constant, so fixed cost per unit decreases. Statement 1 is false.

Analyze Statement 2

Fixed cost per unit is calculated as total fixed cost divided by activity level. Since total fixed cost is constant, the per-unit cost varies inversely as activity level rises and falls. Statement 2 is true.

Analyze Statement 3

A decrease in production (activity level) means the constant total fixed cost is spread over fewer units, which increases the fixed cost per unit. Statement 3 is false.

Answer:

• Statements 1 and 3 are true.
• Only statement 2 is true. (Correct answer)
• Statements 1 and 2 are true.
• Only statement 3 is true.