Which term defines costs that change with output quantity?

• A. Fixed costs
• B. Sunk costs
• C. Variable costs
• D. Opportunity costs

Answer: (C)

Variable costs are costs that change with the level of production. As you produce more units, you need more materials and often more direct labor, so the total cost increases proportionally with output. The per-unit cost of these inputs can stay roughly constant, but the overall expense rises as you crank up production. This is different from fixed costs, which stay the same regardless of how much you produce in the short run (think rent or salaries that don’t vary with output). Sunk costs are past, irrecoverable expenses that shouldn’t affect current decisions, and opportunity costs are the value of the next-best alternative you give up when choosing an option. Because only variable costs change with how much you produce, they best fit the description.