Which one of the following statements about costs is correct?

A) Total costs will decrease as the variable cost per unit increases, all else held constant.
B) A decrease in total fixed costs will increase the net present value of a project, all else held constant.
C) An increase in the variable cost per unit will increase the contribution margin, all else held constant.
D) Total costs will be greater under the best-case scenario than under the base-case scenario.
E) The higher the total costs, the larger the net present value of a project.

Question

Shane Riley - DCHS 2020 · Accepted Answer

Final Answer : B, Explanation :  A decrease in total fixed costs, while keeping all other factors constant, will reduce the overall expenses associated with a project. This reduction in expenses increases the project's profitability, thereby increasing its net present value (NPV). The NPV is a measure of the profitability of an investment and is calculated by subtracting the project's costs from the present value of its expected cash flows. Lower fixed costs mean lower total costs, leading to a higher NPV if all other factors remain unchanged.

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