- This topic has 3 replies, 2 voices, and was last updated 9 years ago by
.
- Posts
Hello,
Please can you help me understand the logic to the following question:
The management accountant of a business has identified the following information:
Activity Level 800 units 1200 units
Total Cost $16,400 $23,600The fixed costs of the business step up by 40% at 900 units.
Q110. What is the variable cost per unit?
Q111: What is the fixed cost per unit?For Q110 I had answered $18 as I had answered as I would any other high/low question but when checking the answer I can see that the authors had calculated 800*1.5 and from that point onwards I was lost.
Can you please help explain the procedure for answering such a question?
Thank you in advance for your help.
I do not have the Kaplan book, and I am wondering if whether you have typed the question or answer correctly (or whether Kaplan have made a mistake in their answer).
Assuming you have typed the question correctly, then the best way is to use a bit of algebra.
Suppose the variable cost per unit is V, and the total fixed cost at the 800 unit level is F.
Then:
800V + F = 16400
and
1200V + 1.4F = 23600If you multiply everything in the first equation by 1.4, then:
1120V + 1.4F = 22960If you subtract each item in this third equation from each item in the second equation, then:
80V + 0 = 640Therefore the variable cost = V = 640/80 = $8.
Kaplan certainly should not have asked for the fixed cost per unit – that would be stupid unless there was something else in the question that you have not typed.
You can find the total fixed cost at the 800 level but putting V = 8 in the first equation and calculating F.
The total fixed cost at levels of more that 900 will be the value of F multiplied by 1.4.There is no logic at all in them multiplying anything by 1.5, unless the question had said that fixed cost increased by 50% (instead of 40%) which suggests there is a mistake in their answer.
Hi John,
Thank you very much for this clarification! It make sense to me now. Initially, I had worked out the question wrong and when looking at the answer I was even more confused to begin with and thought I had missed something vital.
It seems they have definitely made a mistake in their answer as one part says “1.5” and another says “1.4” for the same equations and I was pondering over it for a good while trying to figure out how they found the figure 1.5. It would be easier to snapshot you a picture as their answer is a lot longer than yours above.
I have found there are quite a few errors in the Kaplan text books so I don’t think I will use them again as this has already wasted unnecessary time.
Your lectures are simple, well explained and incredible and have helped me understand the work in a way the text books cannot. Please continue your great work and I look forward to passing all my exams with OpenTuition.
Thank you again for your help and your quick reply! 🙂
- You must be logged in to reply to this topic.