Final answer:
In business, as sales volume increases for a firm like Montgomery Company, the total variable cost will also increase, but the variable cost per unit will remain constant. The analysis of these costs is crucial for determining average total cost, average variable cost, and marginal cost, which inform production and pricing decisions in the long run.
Step-by-step explanation:
When the Montgomery Company, or any firm for that matter, experiences an increase in sales volume, there is an associated behavior in its total variable cost and variable cost per unit, both of which are key concepts in the firm's cost structure analysis. Variable costs are those costs that vary directly with the level of output. In other words, as the firm produces more units, the total variable cost will increase because these costs are incurred per unit of output. However, the variable cost per unit remains constant because these costs are specific to each individual unit.
For instance, if a piece of equipment is needed to produce each unit and the cost of operating this equipment is the same for each unit, even as production increases, the cost of operating the equipment per unit (variable cost per unit) does not change. On the other hand, the total expenditure on equipment operation (total variable cost) will rise in direct proportion to the number of units produced.
From a long-run perspective, firms will base decisions such as the profit-maximizing quantity to produce on average total cost, average variable cost, and marginal cost. The average variable cost is calculated by dividing total variable costs by the quantity of units produced, which gives an idea of the cost per unit at different levels of production. As production levels change, firms must analyze these cost structures alongside sales and revenue to make informed pricing and production decisions.