Question

Last year, Gordon Company sold 20,000 units of its only product.

If sales increase by 20% in the current year, how will unit variable cost and total fixed cost be affected?

Unit Variable Cost Total Fixed Cost
A) Remains constant Remains constant
B) Increases Decreases
C) Decreases Remains constant
D) Remains constant Decreases
E) Remains constant Increases


i) Choice B

ii) Choice E

iii) Choice D

iv) Choice C

v) Choice A

Answer 1

The answer is v) Choice A.

Step-by-step explanation:

First of all, fixed costs are the type of costs which will incur at the same amount without any relation to sales level, thus, Choice B, Choice D and Choice E is eliminated.

Second of all, though sales level increases, given no changes have been mentioned in production activities, Unit Variable Cost will remain constant. It is only Total Variable Cost that will be higher due to higher produced units rather than higher cost to produce a unit.

Thus, v) Choice A is the correct answer.