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A company has a single product with a selling price of $12 per unit, which is calculated as variable cost per unit, plus 20%. At an output level of 5,000 units it makes a loss of $8,000.
15. What is the company’s total fixed cost?
A.$2,000
B.$4,000
C.$18,000
D.$20,000The correct answer is C.
(5,000 × $12 × 20 ÷ 120) + 8,000 = $18,000
The question says that selling price is calculated by adding 20% mark up to the variable cost, which should mean 12/120*100 = 10 Vc per unit. But, they have calculated VC per unit as 12/120*20.
Isn’t this 20% markup on the variable cost and therefore they’re using wrong figure as VC?The answer is correct.
For every 100 variable cost, the profit is 20 and so the selling price is 120.
Putting it the other way round, for every 120 selling price, the cost is 100 and the profit is 20.
so, the variable cost should be $10 (100% of the $12 selling price) and 20% is the profit so profit is 2 dollar, which is the mark up not the variable cost, right?
so FC = (10*5000)+8000= 58000
The contribution is 5,000 x $2 = $10,000.
The profit is the contribution less the fixed cost, so if the profit is minus $8,000, the fixed costs must be $18,000.
Will I understand this better after completing the marginal and absorption costing chapter? I see that contribution is a concept that is explained in that chapter.
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