How will total variable cost be affected if production increases by 20%?

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BlackTom AI · Accepted Answer

Consider the nature of total variable cost (TVC). TVC varies with the level of production, since it is driven by the amount of output rather than fixed costs that stay constant regardless of output.
Option 1: 'It will decrease by 20%.' This is incorrect because variable costs do not automatically fall when output rises; they typically increase as more units are produced, assuming per-unit variable cost is not negative—which it isn’t in standard cost theory.
Option 2: 'It will increase by 20%.' This is correct if we assume per-unit variable cost is constant. With a 20% rise in production, the total variable cost rises proportionally by 20% due to the unit cost remaining unchanged.
Option 3: 'It will remain the same.' This would only hold if production did not change or if variable costs were somehow fixed, which contradicts the definition of variable costs.
Option 4: 'It will increase by more than 20%.' This would imply a non-linear or increasing per-unit variable cost as output grows, which is a special case (like rising marginal costs) not indicated in the question. In the general case with constant per-unit cost, the increase is exactly 20%.
In summary, under standard assumptions of constant per-unit variable cost, a 20% increase in production leads to a 20% increase in total variable cost.

How will total variable cost be affected if production increases by 20%?

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