cost classification

The simplest way is to look at it as equations. Suppose the fixed cost is F (before the 20% increase), and the variable cost per unit is V. Then at the low level the total cost: 2,000 = F + 1,000V At the high level. the total cost: 3.500 = 1.2 F + 2,000V If you multiply everything in the 'low' equation by 1.2, then you get: 2,400 = 1.2 F + 1,200V Now you can subtract this equation away from the high equation which gives: 1,100 = 800V So the variable cost per unit = V = 1100/800 = $1.375 Hope that helps :-)

Hi Sir, The correct answer given is $0.625. I took 2,500/1000 = 2.5 and 3,500/2000 = 1.75. The cost different between two is $0.75. And i assume this is 120% and the 100% is $0.625. Is this suppose to be correct?

Sorry for the double post, is it possible to explain why when Cost per holding increase, Cost per ordering increase as well? Using EOQ formula.

If you typed the question correctly, then my answer if correct. (what you have copied as the 'correct' answer is certainly wrong!!!) Check that you did type the question correctly. (you can check my answer as well - although it wasn't asked for, the fixed cost at the lower level is 625 and at the higher level is 20% more at 750)

I will answer your second question, but in future please start a new thread when it is a different topic. However, what you are asking does not really make sense. By 'cost per holding', do you mean the holding cost per unit? If you do mean that, then if the holding cost per unit increases then the EOQ will be lower. If the EOQ is lower we will need to place more orders. If we place more orders then the total ordering cost over the year will increase (not the cost per order - the total order cost over the year).