$1.$ Managers must be able to identify how their decisions will impact costs. Assume Company X plans to increase production from $20$ to $120$ units to keep up with consumer demand, which costs will be affected? Certain costs will increase with production $($i$.$e$.,$ variable costs$)$ and other costs will remain unchanged $($i$.$e$.,$ fixed costs$).$ For example, if the cost of materials is $$5$ per unit, increasing production by $100$ units will result in a $$500$ increase in total materials cost. However, if the factory manager is paid a salary of $$75,000$ per year, the manager's total salary will remain constant despite the increase in production. Why does the manager's salary remain constant? Because the manager is paid a fixed salary per year. The salary is not based on the number of units produced. In this example, the cost of materials is variable and the factory manager's salary is fixed. As a rule of thumb, variable and fixed costs are named based on how the total cost behaves relative to changes in activity $($see

$2.$Now

let's consider the costs on a per$-$unit basis.

A$.$ Cost of materials per unit is $$5.$ This means that every additional unit produced will incur $$5$ of materials cost. Therefore, the cost of materials is constant on a per$-$unit basis.

B$.$ What is the cost per unit of the manager's salary? When only $20$ units were produced the salary cost was $$3,750$ per unit $($ $$75,000$ salary $\frac{?}{20}$ units$).$ If production increases to $120$ units, the salary cost decreases to $$625$ per unit $($ $$75,000$ salary$/120$ units$).$