What type of expenses generally increases and decreases with production levels?

What type of expenses generally increases and decreases with production levels?

• A. Fixed costs
• B. Variable costs
• C. Administrative costs
• D. Opportunity costs

Answer: (B)

The correct answer is variable costs, as these are directly related to the level of production. When a business increases its production, variable costs rise because they include expenses that vary with output, such as materials, labor, and utility costs needed for production. Conversely, if production decreases, the variable costs will also fall because fewer resources are required. Fixed costs, on the other hand, remain constant regardless of the level of production. These expenses, such as rent, salaries of permanent staff, and insurance, do not fluctuate with the volume of goods produced. Administrative costs may include fixed and variable components but are not strictly tied to production levels. Opportunity costs, while important in decision-making, do not represent direct expenses and are more about the trade-offs of choosing one option over another in resource allocation.

The correct answer is variable costs, as these are directly related to the level of production. When a business increases its production, variable costs rise because they include expenses that vary with output, such as materials, labor, and utility costs needed for production. Conversely, if production decreases, the variable costs will also fall because fewer resources are required.

Fixed costs, on the other hand, remain constant regardless of the level of production. These expenses, such as rent, salaries of permanent staff, and insurance, do not fluctuate with the volume of goods produced. Administrative costs may include fixed and variable components but are not strictly tied to production levels. Opportunity costs, while important in decision-making, do not represent direct expenses and are more about the trade-offs of choosing one option over another in resource allocation.