When analyzing the effect of increasing activity levels on unit costs, we consider both variable costs and fixed costs:
1. Variable Cost per Unit:
- Variable costs per unit typically remain the same with increasing activity levels. This is because variable costs are directly proportional to the level of activity. For each additional unit produced, the cost incurred remains constant per unit.
2. Fixed Cost per Unit:
- Fixed costs per unit typically decrease with increasing activity levels. Fixed costs are costs that do not change with the level of activity within a certain range. As production increases, the total fixed cost is spread over a larger number of units, which decreases the fixed cost allocated to each individual unit.
Therefore, summarizing the effects:
- The variable cost per unit remains the same with increasing activity levels.
- The fixed cost per unit decreases with increasing activity levels.
