Joshua Company produces and sells a product that has variable costs of $7 per unit and fixed costs of $200,000 per year. If production increases from 20,000 units to 25,000 units, the unit cost will:
A) decrease by $2 per unit
B) decrease by $8 per unit
C) increase by $35,000
D) not change

Question

Quizplus · Accepted Answer

The unit cost decreases because the fixed costs are spread over more units. Initially, the fixed cost per unit is $200,000/20,000 = $10. When production increases to 25,000 units, the fixed cost per unit becomes $200,000/25,000 = $8. Thus, the unit cost decreases by $2 per unit.

Joshua Company Produces and Sells a Product That Has Variable