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Question: A company rents its for $90000 per annum. This year 60,000 units have been manufactured utilising 75% of its total capacity. Next year the plan is to manufacture $100,000 units by using the existing factory at full capacity and by renting just sufficient additional capacity. The additional capacity is available at the same rental cost per square meter as the existing factory.
What is the budgeted total rental cost for next year?
In the above question, total number of square meters are not given, so how would the cost of rent be apportioned to different number of units made. It it going to be apportioned on the basis of number of units or on the basis of total capacity. Also what should be the approach to solving this question. Should high low technique be used or even regression analyses can be used to arrive at the solution.Assuming that you have copied the question correctly and that there is no mention of the square meters (which is strange) then you have no choice but to base the cost of the number of units.
You know that the maximum capacity is 60,000/75% = 80,000 units.
Therefore they need capacity for an extra 20,000 units.Therefore the total rental cost will be 100,000/80,000 x $90,000.
Neither high low nor regression analysis have any relevance for this question.
Again, why are you attempting questions for which you do not have an answer. You must use a Revision Kit from one of the ACCA approved publishers.
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