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The costs of the factory maintenance department for Freer Co appear to have a variable element dependent upon the number of units produced. The fixed element of the costs steps up by $30,000when 32,000 or more units are produced. The variable cost per unit is constant.
Volume of production
28,000 Units $160,000
34,000 Units $208,000
What would be the total cost for 29,000 units and the total cost for 35,000 units?
The answer has three steps: and I do not understand the first two steps, which are
Step 1 Find the highest and lowest levels of activity (note that this is the activity level and is not
necessarily the highest and lowest cost).In this case, we only have two levels of activity so we have to use those.
Step 2 Compare the activity level and costs for each of these but deduct the extra step up fixed cost for 34,000 units.
Could you explain this?
The increase in the total cost is $48,000. However part of this increase is due to the step up in fixed costs of $30,000.
Therefore only the remaining $18,000 is the extra variable cost of the extra 6,000 units.
So the variable cost per unit is 18,000/6,000 = $3 per unit.
You should now be able to find the total cost for 29,000 and 35,000 units using the normal high low approach as explained in our free lectures 🙂