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Hi sir please help with this question:
Over the last two months the following production costs were incurred by dept Z:
Level of Activity Production Cost
May 5,269 units $36614
June 4,821 units $33926In July budgeted production was 2,560 units. what was budgeted production cost for July?
Have you watched the lecture on high-low (because this question is actually a very straight forward one)?
The variable cost per unit = (36614-33926)/(5269-4821) = $6
So the cost of 2560 units = 33926 – (4821-2560) x $6 = £20360
(or, if you prefer, 36614 – (5269-2560) x $6 = $20360 )
Sir why do you subtract 4821 with 2560 and then multiply by 6?
why don’t u multiply 2560 by 6 directly?
I didn’t get this point. Kindly clarify Sir..Sir I have one more doubt in this section:
Activity level(units) 15000 25000
Total cost($) 94500 151500Variable cost are constant at all activity level but fixed cost increase by $2000 every 10000 units
What are The fixed cost at an activity level of 5000 units?
We know the total cost for 4821 is $33926
The only reason that the total cost for 2560 will be different is that the total variable cost will be lower (the fixed cost will stay the same).
So….we reduce the total cost of the 4821 by the variable cost of the number of units fewer i.e. 4821-2560
(If you prefer, then calculate the fixed cost and then add to it the variable cost of 2560 units at $6 each. You will get the same answer. It just takes a bit longer.)
The difference in cost is 151500 – 94500 = 57000.
Fixed costs will have increased by $2000So the variable cost increase is 57000 – 2,000 = 55,000.
This is over an increase of 10,000 units. So the variable cost is 55/10 = $5.50 per unit.So at 15,000, total variable cost is 15000 x $5.50 = 82500
Total cost is 94500, so fixed cost is 94500 – 82500 = 12000
At a level of 5000 units, fixed cost is 2,000 lower, so is 12000 – 2000 = $10,000
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