Which statement best describes unit cost as activity increases?

Which statement best describes unit cost as activity increases?

• A. Unit cost rises as activity increases
• B. Unit cost falls as activity increases
• C. Unit cost stays constant
• D. Unit cost is unpredictable

Answer: (B)

As activity increases, unit cost tends to fall because fixed costs are spread over more units. Unit cost is total cost divided by the number of units produced. Fixed costs stay the same in total, so when you produce more units, the fixed cost per unit drops. If the variable cost per unit remains roughly constant, the overall unit cost declines as activity rises (until any capacity limits or step costs alter the pattern). So the best description is that unit cost falls as activity increases. If unit cost stayed constant, that would imply fixed costs aren’t being spread, which isn’t typical; if unit cost rose with more activity, that would require variable costs per unit to increase or fixed costs to rise faster than activity, which isn’t the usual case in simple cost behavior.

As activity increases, unit cost tends to fall because fixed costs are spread over more units. Unit cost is total cost divided by the number of units produced. Fixed costs stay the same in total, so when you produce more units, the fixed cost per unit drops. If the variable cost per unit remains roughly constant, the overall unit cost declines as activity rises (until any capacity limits or step costs alter the pattern).

So the best description is that unit cost falls as activity increases. If unit cost stayed constant, that would imply fixed costs aren’t being spread, which isn’t typical; if unit cost rose with more activity, that would require variable costs per unit to increase or fixed costs to rise faster than activity, which isn’t the usual case in simple cost behavior.