Future Business Leaders of America (FBLA) Agribusiness Practice Test

Which type of cost does not change with production volume within a relevant range?

1. Variable costs

2. Direct costs

3. Fixed costs

4. Overhead costs

The correct answer is: Fixed costs

Fixed costs are expenses that remain constant regardless of the level of production or activity within a relevant range. This means that, whether a business produces zero units or a thousand units, the total cost associated with fixed resources, such as rent, salaries of permanent staff, and insurance, will not change. In essence, fixed costs do not fluctuate with production volume, which is critical for businesses to understand in order to manage their budgeting and forecasting accurately. Variable costs, on the other hand, are directly tied to production levels and will increase or decrease as production volume rises or falls. Direct costs are costs that can be directly attributed to a specific product or service, and these can also vary based on production volume. Overhead costs can include both fixed and variable components, making them not entirely predictable in relation to production levels. Understanding the nature of fixed costs is crucial for businesses as they plan financial strategies, assess break-even points, and determine profit margins, particularly in scenarios involving scaling production up or down.