A furniture firm doubles the number of chairs it makes in a week. Which of the following correctly shows the effect of this on the rent of its building and on the cost of wood used?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → The rent stays the same; the cost of wood doubles.
Option (1) The rent stays the same; the cost of wood doubles. — Correct. Rent is a fixed cost: it does not change with the volume of production. Wood is a variable cost: it changes in direct proportion with output. Twice the chairs need twice the wood, while the rent stays the same.
Option (2) The rent doubles; the cost of wood doubles. — Incorrect. The cost of wood doubles, but rent is a fixed cost. It stays the same whether the firm makes 10 chairs or 1,000.
Option (3) The rent stays the same; the cost of wood rises but not in direct proportion. — Incorrect. Rent stays the same, but wood is a variable cost and doubles. A cost that rises but not in direct proportion is a semi-variable cost.
Option (4) The rent rises but not in direct proportion; the cost of wood doubles. — Incorrect. A cost that rises but not in direct proportion is a semi-variable cost, such as a fixed salary plus commission. Rent is a fixed cost.
NCERT (2026-27 Edition): “1. Product cost: … There are broadly three types of costs: viz., Fixed Costs, Variable Costs and Semi Variable Costs. Fixed costs are those costs, which do not vary with the level of activity of a firm say with the volume of production or sale. For example, rent of a building or salary of a sales manager remains the same whether 1000 units or 10 units are produced in a week. Those costs which vary in direct proportion with the level of activity are called variable costs. For example, the costs of raw material, labour and power are directly related with the quantity of goods produced. Let us say, if the cost of wood for manufacturing one chair comes to ₹ 100 the cost of wood for 10 chairs would be ₹ 1000. Obviously, there will be no cost of wood if no chair is produced. Semi variable costs are those costs which vary with the level of activity but not in direct proportion with it. …” |