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Explain the effect of a sales volume increase on the total fixed costs, unit fixed costs, total variable cost, and unit variable cost


Total fixed cost refers to costs that are incurred by the business regardless of the number of products or services that it produces. One such cost might be the rent paid for the business’s building. The rent amount does not change with increases or decreases in production. The rent amount remains the same despite the level of output, and the business will be required to pay.

Unit fixed costs refer to the distribution of the total fixed costs for each unit of product produced. Thus, each unit gets an equal portion of the total fixed cost. The unit fixed cost is calculated by dividing the total fixed cost by the number of units produced.

Total variable cost refers to costs that change with fluctuations in output or quantity produced. Thus, the total variable cost is expected to increase in direct proportion to the amount of product produced. One such cost would be labor. More units of a product will require more labor to produce and will increase the cost of labor.

Unit variable cost is similar to unit total cost in that it refers to the amount of the total variable cost that can be equally allocated to each unit of the product.

Therefore an increase in sales volume will affect the above metrics as follows:

The total fixed cost will remain the same despite the increase in sales.

Unit fixed costs will reduce with increases in sales because the units are increasing while the total fixed cost remains the same.

Total variable costs will increase proportionally with increases in sales volume because it costs more to increase output.

Unit variable costs will remain constant despite an increase in sales volume. For instance, the amount of labor (variable cost) required to make a unit of product would remain the same irrespective of the number of units produced.

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