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Question: The following production and total cost information relates to a single product organisation for the last three months:
Month Production Total cost
1 1200 66600
2 900 58200
3 1400 68200
The variable cost per unit is constant up to a production level of 2000 units per month but a step up of $6000 in the monthly total fixed cost occurs when production reaches 1100 units per month.In the above question, can the answer be calculated only by using 900 units and 1400 units and ignoring 1200 units or is it that the first month’s data has to be used to calculate the answer. Also, questions involving stepped fixed costs involve more thought, so how can the answer to such problems be calculated in a systematic way without thinking through too much
It doesn’t matter which two months you take. Most sensible is to take the highest and lowest (so months 2 and 3) as usual, but to remember that of the change in cost of 10,000 then only 4,000 of it relates to the variable cost.
So the variable cost is 4,000 / (1400 – 900) = $8 per unit.
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