What is the primary difference between fixed costs and variable costs?

The primary distinction between fixed costs and variable costs lies in their behavior concerning production levels, which is correctly captured in option C. Fixed costs are expenses that remain constant regardless of the quantity of goods or services produced. This means that whether a company produces a little or a lot, its fixed costs—such as rent, salaries, and insurance—do not change.

In contrast, variable costs fluctuate directly with production volume. As production increases, variable costs, which include expenses like raw materials and direct labor, also rise because more resources are utilized. Conversely, if production decreases, variable costs diminish correspondingly.

This fundamental understanding is critical for businesses when budgeting and forecasting, as it influences decisions on pricing, production levels, and overall financial planning. Recognizing the behavior of fixed and variable costs allows companies to manage their resources effectively and ensure profitability even as production levels change.