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Dear OT Tutor
Could you please assist with Q42 (pg13) Kaplan ACCA MA exam kit.
An organization has the following total costs at three activity levels:
Activity level (units): 8000; 12000; 15000
Total cost: 204k; 250k; 274kVar cost per unit remains constant within this activity range and there is a step up of 10% in the total fixed costs when the activity level exceed 11000 units.
a) 220k
b) 224k
c) 227k
d) 234kThe solution is “a” but im confused by the manner in which they have arrived at this figure?
By using H-L method var cost is $8 (24k/3k) (Understood)
TFC >11 000: 274 000 – (15 000*8) = 154k (Understood)
TFC<11 000: as per Kaplan: (10/11) * 154k = 140k (Confused?)
TC for 10 000 units: (10 000*8) + 140k = 220k
Could you please assist?
Thanks.
There is a step up of 10% in the fixed costs.
Therefore for every $100 of fixed costs at levels below 11,000, they will be 100 + (10% x 100) = $110 at levels above 11,000.
Putting it the other way round, for every $110 at levels above 11,000 they will be $100 at levels below 11,000.
Given that the actual figure is $154K at levels above 11,000 it must therefore be 100/110 x $154K = $140K at levels below 11,000.
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