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The following observations of output and cost have been made:
output units cost in $
8000 39400
20000 68000
It is known that at output levels above 15,000 units, variable cost per unit drops by $1 per unit for all subsequent units produced. What is the variable cost for each unit of output above 15,000 units?
? $1.80
? $0.97
? $2.80
? $3.40sir, can’t we just evaluate the variable cost per unit of 20000 units and subtract $1. sir please explain this to me as I can’t understand from the solution of this question
The $68,000 for 20,000 includes the lower variable for the extra 5,000 units above 15,000.
If the variable cost had not fallen, then the total cost would be 68,000 + 5,000 = $73,000.Using the normal high/low method (as explained in my free lectures) the variable cost per unit (ignoring the fall of $1 per unit) is therefore (73,000 – 39,400) / (20,000 – 8,000) = $2.80
Therefore for each unit above 15,000, the variable cost will be 2.80 – 1.00 = $1.80 per unit.
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