ECONOMICS

Detailed explanation-1: -Changes in the level of activity will cause unit variable and unit fixed costs to change in opposite directions. For CVP analysis, both variable and fixed costs are assumed to have a linear relationship within the relevant range of activity.

Detailed explanation-2: -Variable costs have two main characteristics: (a) The total cost varies in proportion to changes in the level of activity (b) The cost per unit remains constant, regardless of the activity level.

Detailed explanation-3: -Although fixed cost per unit decreases with increases in activity levels, total fixed cost is not affected by changes in the activity level within the relevant range (i.e., total fixed cost remains constant even if the activity level changes. Examples include rent, depreciation, insurance.

Detailed explanation-4: -Variable costs Some costs, such as the cost of direct material, vary with the level of activity and are known as variable costs. These costs tend to vary directly with variations in the level of activity and change every time small changes in activity occur.

Detailed explanation-5: -As activity level increases, the mixed cost line increases at an amount equal to the variable cost per unit. One example of a mixed cost is a telephone bill: there is a flat charge (fixed cost), even if no calls are made, but the total telephone expense increases as calls (variable costs) are made.