What determines fixed cost per unit as volume changes?

The concept of fixed cost per unit relates to how fixed costs behave as production volume changes. Fixed costs, such as rent or salaries, remain constant in total regardless of production levels. However, when you think about fixed costs on a per-unit basis, the situation changes.

As production volume increases, the total fixed costs are spread over a larger number of units, which causes the fixed cost per unit to decrease. This inverse relationship means that for every additional unit produced, the fixed cost allocated to each unit decreases. Conversely, if production decreases, the fixed cost per unit increases because the total fixed costs are divided among fewer units.

This understanding is crucial for decision-making in matters like pricing and budgeting. Therefore, the correct choice accurately reflects that fixed costs per unit vary inversely with the change in volume, reinforcing the principle that as production increases, the average fixed cost per unit decreases.