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The management accountant of a business has identified the following information: activity level 800 units 1200 units. Total cost $16400 $23600. The fixed costs of the business step up by 40% at 900 units. (1) what is the fixed cost at 1100 units ?
Why are you attempting a question for which you do not have an answer? You should be using a Revision Kit from one of the ACCA Approved Publishers – they have answers and explanations!
This is using the high low method. To deal with the step up in fixed costs you can approach it in more than one way, but assuming that you are OK with simply algebra then the easiest it to write up the normal equations.
If the variable cost is V per unit and the fixed cost for production of less that 900 units is F, then:
At 800 units: 800V + F = 16,400
At 1,200 units: 1,200 V + 1.4F = 23,600If you multiply everything in the first question by 1.4, you get:
1,120V + 1.4F = 22,960
If you then subtract each item in this third equation from each item in the second equation you get:
80V + 0 = 640, therefore V = 640/80 = 8 per unit.
You can then put V = 8 in any of the equations and calculate F.
Because this is the fixed cost for production of less that 900 units, then for production of 1,100 units you need to multiply it by 1.4 (which is adding on 40%).
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