Fixed/Variable Cost

A fixed cost is a cost that remains unchanged in total, regardless of changes in the level of total activity or volume. Earthquake insurance for a table factory is a fixed cost, because regardless of whether 200 or 2000 tables are made, the cost for earthquake insurance will be the same. A variable cost is a cost that changes directly in proportion to changes in the level of total activity, or volume. The wood used to make a table is a variable cost, because each additional table requires additional wood for the tables to be made.

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