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A company has the following information in relation to total cost at different levels of activity:
Level of Activity (units)
Total cost
4,000
£34,994
11,000
£64,984
Fixed costs increase by £5,000 when activity is greater than 10,000 units. Variable cost per unit decreases by £0.50 per unit for all units when activity is greater than 12,000 units.What would the total costs be if 13,000 units are produced?
A. £73,580.
B. £72,140.
C. £67,080.
D. £65,624.
Please explain.
Surely you have an answer in the same book in which you found the question – you should use this forum to ask what it is in the answer that you are not clear about, and then I will try and help.
Between 4,000 and 11,000, the cost increases by 29,990. 5,000 of this is the step up in fixed costs, and therefore the remaining 24,990 is the extra variable cost of the extra 7,000 units.
Therefore the variable cost per unit is 24,990/7,000 = £3.57 and the fixed cost (at levels above 10,000) is 64984 – (11,000 x 3.57) = 25,714.Therefore for 13,000 units the total cost is (13,000 x (3.57 – 0.50)) + 25,714 = 65,624.
Have you watched my free lectures? They are a complete free course for Paper F2 and cover everything needed to be able to pass the exam well.
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