When the activity level is expected to decline within the relevant range, what effects would be anticipated with respect to (1) fixed costs per unit and (2) variable costs per unit?
Question
When the activity level is expected to decline within the relevant range, what effects would be anticipated with respect to (1) fixed costs per unit and (2) variable costs per unit?
Solution
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Fixed Costs Per Unit: When the activity level decreases within the relevant range, the fixed costs per unit would increase. This is because fixed costs do not change with the level of output or activity. Therefore, when the activity level decreases, the same amount of fixed costs is spread over fewer units, resulting in a higher fixed cost per unit.
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Variable Costs Per Unit: Variable costs per unit would remain the same when the activity level declines within the relevant range. This is because variable costs change in direct proportion to the level of output or activity. Therefore, a decrease in activity level would result in a decrease in total variable costs, but the variable cost per unit would remain unchanged.
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