Which of the following best describes the behavior of fixed cost per unit as output increases?

• A. Fixed cost per unit increases as output increases.
• B. Fixed cost per unit decreases as output increases.
• C. Fixed cost per unit remains constant regardless of output.
• D. Fixed cost per unit fluctuates unpredictably with output.

Answer: (B)

Verified step by step guidance

1. Understand the definition of fixed costs: Fixed costs are costs that do not change with the level of output produced. Examples include rent, salaries of permanent staff, and equipment costs.
2. Define fixed cost per unit: It is calculated by dividing the total fixed cost (FC) by the quantity of output (Q), expressed as \(\frac{FC}{Q}\).
3. Analyze how fixed cost per unit changes as output increases: Since the total fixed cost (FC) remains constant, when output (Q) increases, the denominator in \(\frac{FC}{Q}\) becomes larger.
4. Recognize the mathematical implication: As \(Q\) increases, \(\frac{FC}{Q}\) decreases because you are spreading the same fixed cost over more units.
5. Conclude that fixed cost per unit decreases as output increases, which reflects the concept of spreading fixed costs over a larger number of units, reducing the cost per unit.