As production increases, which type of cost tends to rise in proportion to output?

• A. Fixed costs
• B. Variable costs
• C. Sunk costs
• D. Irrelevant costs

Answer: (B)

Costs behave based on how they respond to changes in production. The key idea is that fixed costs stay the same no matter how much you produce, at least in the short run, while variable costs rise as you produce more. Variable costs include inputs like raw materials, direct labor, and energy—things you need more of when you manufacture more units. So as production increases, these inputs are used in greater amounts, making total variable costs grow in proportion to output (assuming constant per-unit costs). Sunk costs are past expenditures that aren’t affected by current production, and irrelevant costs are those not affected by the decision at hand, so they don’t drive the relationship between output and cost. Therefore, the type of cost that rises with output is variable costs.