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Chapter 4 (Cost Classification)
Question number 5 (MCQ)
Up to a given level of activity in each period the purchase price per unit of a raw material is constant. After that point a lower price per unit applies both to further units purchased and also retrospectively to all units already purchased.
Which is the following graphs depicts the total cost of raw materials for a period?
Why the answer is not A? Based on A the graph after that particular point the cost dropped, moreover further purchases after that the cost remains below that point. If B is the answer then how it differs from answer D ? Correct me if i’m wrong.
Thank you
The answer is not A. The reason is that because the drop in price applies to all units already purchased (as well as future purchases) the new line must go through the origin (0).
The original line is at the higher price per unit. If the price had always been the lower price then the line would have also gone through the origin, but would have a smaller angle/slope/gradient.
The only graph where this happens is B. (D is different for two reasons – one is that the slope of the new line is the same as that of the old line; the other is that the new line does not go through the origin.
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