Question

1. contrast fixed and variable costs.

Explanation:

Define fixed costs

Fixed costs are expenses that do not change with production volume.
They remain constant regardless of how much output is generated.
Examples include rent, salaries, insurance, and equipment depreciation.

Define variable costs

Variable costs are expenses that change directly with production volume.
They rise as production increases and fall as production decreases.
Examples include raw materials, direct labor, and packaging.

Contrast their relationship with output

Fixed costs are independent of the level of business activity.
Variable costs are directly tied to the level of output.

Contrast their per-unit behavior

Per-unit fixed costs decrease as production volume increases.
Per-unit variable costs remain relatively constant as production changes.

Summarize the key differences

Fixed costs exist even at zero production levels.
Variable costs are zero when production is zero.

Answer:

Fixed costs and variable costs differ primarily in how they behave relative to a business's production volume:

• Fixed Costs: These expenses remain constant in total regardless of the level of goods or services produced (e.g., rent, salaries, insurance). On a per-unit basis, fixed costs decrease as production increases.
• Variable Costs: These expenses change in direct proportion to production volume (e.g., raw materials, direct labor, packaging). On a per-unit basis, variable costs remain relatively constant.