Question 8

Total variable costs decrease in direct proportion

As sales volume decreases, total variable costs also decrease in direct proportion to the reduction in production levels, since variable costs are directly tied to the quantity of goods produced.

A) Total variable costs decrease in direct proportion

This option is correct because variable costs fluctuate with production levels. When sales volume declines, the costs associated with producing each unit (such as materials and labor) will also decline, leading to a decrease in total variable costs that is directly proportional to the change in sales volume.

B) Total fixed costs increase in direct proportion

This option is incorrect because total fixed costs, such as rent and salaries, remain constant regardless of the sales volume. They do not change with fluctuations in production levels, so they cannot increase as sales volume decreases.

C) Total fixed costs decrease in direct proportion

This option is also incorrect because fixed costs do not decrease with a change in sales volume. Fixed costs are incurred regardless of how many units are produced or sold, so they remain unchanged when sales volume declines.

D) Total variable costs increase in direct proportion

This option is incorrect as it contradicts the relationship between sales volume and variable costs. Since variable costs are dependent on the amount of production, a decrease in sales volume leads to a decrease in total variable costs, not an increase.

Conclusion

The correct answer, that total variable costs decrease in direct proportion, accurately reflects the relationship between sales volume and variable costs. All other options incorrectly describe the nature of fixed and variable costs in relation to changes in sales volume, demonstrating a fundamental misunderstanding of cost behavior in accounting.