What is meant by the phrase “spreading the overhead”? A. As production increases, average fixed cost declines. B. As production increases, average fixed cost declines and then increases. C. As production increases, average fixed cost increases. D. As production increases, average variable cost always increases.
Question & Answer
What is meant by the phrase “spreading the overhead”?
1 Answer
Verified archiveThe correct answer is A. As production increases, average fixed cost declines.
Explanation: The phrase “spreading the overhead” refers to the idea that as a company produces more units, its fixed costs (such as rent, salaries, and equipment) are distributed over a larger number of units. This leads to a decrease in average fixed cost per unit since the total fixed cost remains the same, but is divided across more units.