What distinguishes fixed costs from variable costs?

• A. Fixed costs stay the same regardless of output; variable costs change with output.
• B. Fixed costs rise with production; variable costs stay constant.
• C. Both stay constant.
• D. Fixed costs only occur in manufacturing.

Answer: (A)

Fixed costs are expenses that do not change with how much you produce. They stay the same regardless of output, at least within a relevant range. Variable costs, on the other hand, move with production: as you produce more, these costs rise; if you produce less, they fall.

So, the statement that fixed costs stay the same regardless of output while variable costs change with output captures the essential distinction. Examples help: fixed costs include rent, insurance, and salaries of permanent staff, which don’t vary with how many units you make. Variable costs include direct materials and hourly labor tied to production, which increase as more units are produced.

The other ideas don’t fit. Fixed costs don’t rise with production; that would be variable or mixed costs. It’s not true that both stay constant, because variable costs do change with output. And fixed costs aren’t limited to manufacturing; any business with ongoing commitments like rent or depreciation has fixed costs.