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Variable cost per unit is constant within this activity range and there is a step up of 10% in the total fixed costs when the activity level exceeds 5,500 units.
What is the total cost at an activity level of 5,000 units?
Calculate the variable cost per unit by comparing two output levels where fixed costs will be the same:
Variable cost per unit = [(54,800 – 50,000) / (7,500 – 6,000)] = $3.20
Total fixed cost above 5,500 units = [54,800 – (7,500 x 3.20)] = $30,800
Total fixed cost below 5,500 units = 30,800/110 x 100 = $28,000
Total cost for 5,000 units = [(5,000 x 3.20) + 28,000] = $44,0
My question is why the have multiplied 110 with 100…it is general if percentage is 110 the it should be 30800×110%.but it is 30800÷110×100..why this is so..please explain me..thank you..
$30,800 is the fixed cost when the activity level is more than 5,500 units, and is therefore 10% higher than it is when the activity level is less that 5,500 units.
If X is the fixed costs when the activity level is less than 5,500 units, then the fixed cost when the activity level is more than 5,500 is X x 110%
Therefore, X x 110/100 = 30,800
Therefore X = 100/110 x 30,800 = 28,000
(which is obviously easily checkable. Add 10% to 28,000 and you will get 30,800 !)