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Which of the following is not true for the variable cost?
Variable cost is zero when output quantity is zero.
Initially with increase in production variable cost per quantity reduces but beyond some point it increases sharply.
Costs like insurance, license fees, etc are example of variable cost.
Economic of scale greatly effects variable cost
Costs like insurance, license fees, etc are example of variable cost.
Variable costs are expenses that fluctuate in direct proportion to the level of production or output volume. Insurance, license fees, and property taxes are classified as fixed costs (or overheads) because they remain constant regardless of whether production is at zero or maximum capacity.
Variable costs are expenses that fluctuate in direct proportion to the level of production or output volume. Insurance, license fees, and property taxes are classified as fixed costs (or overheads) because they remain constant regardless of whether production is at zero or maximum capacity.
TC=FC+VC
AVC=QVCтАЛ
Total Cost (TC) is defined as the sum of Fixed Cost (FC) and Variable Cost (VC). While VC=0 when output Q=0, FC>0 always exists to sustain the entity's readiness. As production increases, VC changes based on the efficiency of resource utilization, following the law of variable proportions.
Fixed costs remain constant over a specific range of output.
Variable costs represent direct labor, raw materials, and energy used in production.
The law of diminishing returns causes variable costs per unit to decrease initially, then increase.
Economies of scale lead to a reduction in average costs as the scale of operation increases.
Provides visibility into operational efficiency.
Helps in calculating the break-even point accurately.
Difficult to distinguish in mixed cost scenarios.
Assumption of linearity may not hold at high production levels.
Profit planning and budgeting.
Determining the shutdown point for a production line.
Fixed costs: Costs like rent, insurance, and interest that do not change with production levels.
Option B refers to the 'U-shaped' nature of the Average Variable Cost curve due to efficiency gains followed by inefficiency (diminishing returns).
C is correct тАФ Insurance and license fees are periodic, unavoidable expenses, characterizing them as fixed costs rather than variable costs.
Always look for 'time-based' expenses in engineering economics; if a cost is charged regardless of production activity (like annual insurance), it is a Fixed Cost.