Which statement about fixed costs is true?

• A. They increase with higher production
• B. They vary directly with the number of clients
• C. They are always paid as taxes
• D. They remain constant regardless of production or activity level

Answer: (D)

Fixed costs stay the same regardless of how much you produce or how active your business is, at least within a normal operating range. This is why the statement is true: costs like rent, salaries of permanent staff, and insurance don’t fluctuate with production levels in the short term. They are incurred even when output is zero and remain constant as output changes.

The other ideas mix up the nature of fixed versus variable costs. Costs that increase with production or with the number of clients are variable costs, not fixed. The notion that fixed costs are always paid as taxes isn’t accurate, since fixed costs include many items (rent, depreciation, insurance, salaries) that aren’t taxes.