Which expression correctly represents total costs?

• A. Total revenue minus total costs
• B. Fixed costs plus variable costs
• C. Price times quantity
• D. Fixed costs times variable costs

Answer: (B)

Total costs are the sum of fixed costs and variable costs. Fixed costs stay the same no matter how much you produce, like rent or salaries for permanent staff, while variable costs change in proportion to output, such as materials and direct labour. So, at any given level of production, total costs equals fixed costs plus variable costs.

For example, if fixed costs are $1,000 and variable costs are $5 per unit for 200 units, variable costs total $1,000, making total costs $2,000.

The expression that adds fixed costs to variable costs is the correct representation of total costs. The other expressions describe different concepts: total revenue minus total costs equals profit; price times quantity equals total revenue; fixed costs multiplied by variable costs isn’t the standard way to calculate total costs.