Which statement about variable and marginal costs is correct?

Which statement about variable and marginal costs is correct?

• A. Variable cost is a close approximation of marginal cost within the relevant range.
• B. Variable cost per unit is usually constant.
• C. Both statements are correct.
• D. Neither statement is correct.

Answer: (C)

The main idea is how variable costs behave as output changes and how that relates to marginal cost. Marginal cost is the extra cost of producing one more unit. Within the relevant range, total variable cost grows in direct proportion to output, so the variable cost per unit stays roughly constant. When the per-unit variable cost is constant, the cost of producing one more unit—the marginal cost—equals that same per-unit variable cost. That makes marginal cost essentially the same as the variable cost for an additional unit, so variable cost serves as a close approximation to marginal cost in this range. Because we’re assuming a constant per-unit variable cost within the relevant range, that per-unit cost is typically constant as production increases. Outside this range, nonlinearity or step costs can cause these relationships to break down. So both statements hold in standard planning and control contexts.

The main idea is how variable costs behave as output changes and how that relates to marginal cost. Marginal cost is the extra cost of producing one more unit. Within the relevant range, total variable cost grows in direct proportion to output, so the variable cost per unit stays roughly constant. When the per-unit variable cost is constant, the cost of producing one more unit—the marginal cost—equals that same per-unit variable cost. That makes marginal cost essentially the same as the variable cost for an additional unit, so variable cost serves as a close approximation to marginal cost in this range. Because we’re assuming a constant per-unit variable cost within the relevant range, that per-unit cost is typically constant as production increases. Outside this range, nonlinearity or step costs can cause these relationships to break down. So both statements hold in standard planning and control contexts.