[kalange]

*The highest and lowest activity levels above 5500 units and their associated costs are chosen:

(1) Variable cost per unit = [(54,800 – 50,000) ÷ (7,500 – 6,000)] = $3.20

*You can use either activity level (high or low); it will give the same answer:

(2) Total fixed cost above 5,500 units = [54,800 – (7,500 × 3.20)] = $30,800

*Because the highest and lowest activity levels were above 5500, we can assume that a step up of 10% has already occurred and that our Total fixed cost of $30,800 is actually 110% in value (i.e. 100% + 10% =110%), so to determine the total fixed cost without the extra 10%, we divide the Total fixed cost of $30,800 by 110% to bring it to a value of 1% (i.e. $30,800 ÷ 110 =$280), we then multiply the 1% value by 100 to bring it to 100% value (i.e. $280 x 100 = $28,000):

(3) Total fixed cost below 5,500 units = 30,800/110 × 100 = $28,000

*Now that we’ve determined Total fixed cost at 100%, we can now use it to calculate the total fixed cost at different activity levels:

(4)Total cost for 5,000 units = [(5,000 × 3.20) + 28,000] = $44,000

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