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Hi John!
There is a question in the kaplan kit which I am having some difficulties to solve.
1)Activity Level: 800 Units
Total Cost: $16,4002)Activity Level: 1,200 units
Total Cost: $23,600The fixed cost of the business step up by 40% at 900 units.
What is the variable cost?
-The answer is $18.00
-How to deal with that “step up” of 40%?
-How to obtain the answer?Thanks.
Best is to use a little algebra:
At the 800 level: 16400 = 800V + F (1)
At the 1,200 level: 23600 = 1200V + 1.4F (2)
If you multiply (1) by 1.4, then:
22960 = 1120 + 1.4F (3)If you subtracts (2) away from (3), then:
640 = 80VSo V = 640/80 = $8
(Either you have typed out the answer wrongly, or there is a mistake in the Kaplan Kit. $8 is the correct answer, and although it is not asked for the fixed costs at the lower level are $10,000 and so at the higher level they are $14,000. If you check, then these figures are correct 🙂 )
Sorry I have typed the answer wrongly. Your answer is correct.
And by the way, your working is much more simpler to understand and I have understood it.
Thanks a lot! 🙂
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