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An organisation has the following total costs at two activity levels:
Activity level (units)16,000
22,000
Total costs ($)
135,000
170,000
Variable cost per unit is constant within this range of activity but there is a step up of $5,000 in the total fixed costs when the activity exceeds 17,500 units.
What is the total cost at an activity of 20,000 units?$160,000
This requires the use of simultaneous equations:
135,000 = fixed cost + (16,000*variable cost)
170,000 = fixed cost + (22,000*variable cost) + 5,000fixed cost = 55,000
variable cost = 5thus at 20,000 units, cost = 55,000 + (20,000*5) + 5,000 = 160,000
Although alkemists answer is correct, all you need do is look at the difference in costs and units as normal, so there is an extra 35000 cost for an extra 6000 units.
However 5000 of the extra cost is the extra fixed cost, so the extra variable cost is the remaining 30000. This is for an extra 6000 units, so the variable cost per unit is 30000/6000 = 5 per unit.
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