Q.Distinguish between Fixed Cost and Variable Cost, giving two examples of each, and explain how the per-unit amount of each behaves when the level of output changes.

Fixed Cost and Variable Cost differ in how their TOTAL amount responds to a change in output, and this in turn produces opposite behaviour in their PER-UNIT amounts.

Fixed Cost (e.g. factory rent, insurance premium) stays the same in total for the period no matter how many units are produced; because the same total is spread over more units, its cost PER UNIT falls as output rises (and rises as output falls). Variable Cost (e.g. direct material, piece-rate wages) rises and falls in total roughly in proportion to output; its PER-UNIT amount stays broadly the same at any volume.

Fixed Cost is a cost that remains constant in TOTAL, for a given period, regardless of the level of output produced, within the normal range of activity. Examples: factory rent, insurance premium on the factory building, and straight-line depreciation of machinery — each of these is a fixed rupee amount for the period whether the factory produces 100 units or 10,000 units.

Variable Cost is a cost that changes in TOTAL broadly in proportion to the level of output. Examples: direct material consumed (more units need more material) and direct labour paid on a piece-rate basis (more units mean more pieces completed, hence more wages).

Per-unit behaviour is where the two costs behave in exactly opposite ways:

• A Fixed Cost's TOTAL is unchanged, so spreading that same total over a LARGER number of units means the cost per unit FALLS as output rises (and, conversely, rises as output falls, since the same fixed total is now spread over fewer units).
• A Variable Cost's TOTAL rises and falls with output, but because it rises/falls in proportion to the very units it is spread over, its cost PER UNIT stays broadly CONSTANT regardless of the volume produced.

The same distinction can also be stated graphically: plotted against output on the horizontal axis, a Fixed Cost is a flat horizontal line (same total at every output level), while a Variable Cost is a straight line rising from the origin (zero cost at zero output, rising steadily as output grows).

A very common error is describing a Fixed Cost as one that 'never changes' without the qualifier 'in total, within the relevant range' — a fixed cost CAN change (e.g., rent is renegotiated, a second factory shed is rented once output crosses a certain level), it simply does not change WITH OUTPUT within the normal range being considered. Equally common is confusing the total-vs-per-unit direction: students sometimes state that fixed cost per unit rises with output, which is the exact opposite of the correct relationship.