Question

Distinguish between fixed and variable costs, giving one example of each.

Answer 1

Fixed cost refers to the cost which does not change with change in the level of output. It remains fixed irrespective of the level of output.

Example: Cost incurred on the installation of plant and machinery.

Variable cost refers to the cost which rises as the level of output rises and falls as the level of output falls.

Example: Cost incurred on the purchase of raw materials.