Explanation :
Fixed costs, on the other hand, do not fluctuate with the production levels. Fixed costs are always the same. A good example of a fixed cost is rent. It doesn’t matter whether the piano manufacturer makes 10 pianos or 100 pianos, the rent expense will always be the same.
Notice that the piano company producing fewer pianos can decrease variable costs, but lower levels of production cannot decrease fixed costs. This means that variable costs could be decreased to zero or completely eliminated if production ceased. Fixed costs, however, would still remain the same even at a production level of zero.In a nutshell :
- A variable cost is an expense that changes in proportion to production output or sales.
- When production or sales increase, variable costs increase; when production or sales decrease, variable costs decrease.
- Variable costs stand in contrast to fixed costs, which do not change in proportion to production or sales volume.
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