Entrepreneurship and Small Business (ESB) Certification Practice Exam

What do variable costs depend on?

1. Production

2. Sales volume

3. Market demand

4. Administrative expenses

The correct answer is: Production

Variable costs are expenses that fluctuate in direct proportion to the production level or sales volume of a business. They increase as more products are produced and decrease when production drops. For example, if a company manufactures more units, the costs associated with raw materials, labor directly involved in manufacturing, and other costs that vary with the number of units produced will rise. While the terms "production" and "sales volume" are closely related, focusing on production makes clear that variable costs are linked directly to the volume of goods produced. If a company decides to produce 1000 units instead of 500, variable costs will be incurred based on the resources needed for that increased production level. The other choices such as market demand and administrative expenses provide context for overall business operations but do not directly influence the variable cost structure in the same immediate way that production levels do. Market demand can affect sales volume and indirectly influence variable costs, but it is not the primary factor. Administrative expenses tend to be fixed costs, which do not change with production levels and thus are not included in variable costs.