Which of the following is not true for the variable cost?

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Examoogle · Accepted Answer

Costs like insurance, license fees, etc are example of variable cost.

Explanation: Variable costs are expenses that fluctuate directly in proportion to the level of output or production volume. Fixed costs, on the other hand, are expenses that remain constant regardless of the output level, such as insurance, property taxes, and license fees, making them independent of production volume.

Working Principle: In engineering economics, the total cost ($TC$) is expressed as $TC = FC + VC(Q)$, where $FC$ represents fixed costs and $VC(Q)$ represents variable costs as a function of output $Q$. Since $FC$ does not vary with $Q$, it persists even when $Q = 0$. Conversely, $VC(Q)$ scales with production activity due to factors like raw material consumption, power consumption, and direct labor wages.

Key Formulas: $TC = FC + VC(Q)$ — Total cost as a function of fixed and variable costs; $AVC = \frac{VC}{Q}$ — Average variable cost per unit of output

Key Points: Fixed costs are incurred even when production is zero (e.g., rent, insurance).; Variable costs change proportionally with the production quantity ($Q$).; The Law of Variable Proportions causes variable costs to initially decrease per unit (economies of scale) before rising due to inefficiencies.; Total cost is the sum of fixed and variable components.

Advantages: Better cost control by segregating fixed and variable components.; Helps in determining the break-even point ($BEP$).

Disadvantages: Classification can be ambiguous for semi-variable costs.; Assumes linear relationships which may not hold in extreme production ranges.

Applications: Project feasibility analysis.; Pricing strategies for manufactured goods.; Operational budgeting in industrial plants.

Additional Info: Insurance, license fees, and depreciation are classic examples of Fixed Costs because they must be paid regardless of whether the factory is producing 0 units or 1000 units.. Option A is true: If output is 0, variable resources like labor and raw materials are not utilized, making $VC = 0$.. Option B is true: Reflects the behavior of Average Variable Cost ($AVC$) due to increasing and then diminishing marginal returns.. Option D is true: Economies of scale refer to cost advantages that enterprises obtain due to their scale of operation, which directly affects variable cost efficiency.

Answer: C is correct — Costs such as insurance and license fees are categorized as fixed costs, not variable costs, because they do not change with the volume of production.

Exam Tip: In engineering economics problems, always identify 'time-bound' expenses (rent, insurance, salaries) as Fixed Costs and 'activity-bound' expenses (raw materials, fuel) as Variable Costs.

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