Association of Chartered Certified Accountants (ACCA) Certification Practice Test

How do fixed costs affect the average cost curves as volume increases?

1. They increase average variable costs

2. They cause average fixed costs per unit to decrease

3. They remain constant across production levels

4. They are not considered in cost curve calculations

The correct answer is: They cause average fixed costs per unit to decrease

As production volume increases, fixed costs are spread over a larger number of units, leading to a decrease in average fixed costs per unit. Fixed costs do not vary with the level of production; they remain constant in total, regardless of the volume. Therefore, as more units are produced, the total fixed cost is divided by a larger quantity, resulting in a lower average fixed cost per unit. This phenomenon is fundamental in understanding how average cost curves are shaped, particularly the average total cost curve, which includes both variable and fixed costs. While average variable costs may fluctuate with production volume, fixed costs' essential characteristic of being constant demonstrates their significant role in the overall cost structure as output increases. This decrease in average fixed cost per unit highlights the importance of economies of scale, where spreading fixed costs over more units can lead to lower average costs as production ramps up.