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question :
An organisation has the following total costs at three activity levels:
Activity level (units) 8,000 12,000 15,000
Total cost $204,000 $250,000 $274,000
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 11,000 units.
What is the total cost at an activity level of 10,000 units?solution :
Variable cost per unit = [($274,000 – $250,000) ÷ (15,000 – 12,000)] = $8
Total fixed cost above 11,000 units = [$274,000 – (15,000 × $8)] = $154,000
Total fixed cost below 11,000 units = (10 ÷ 11) × $154,000 = $140,000
Total cost for 10,000 units = [(10,000 × $8) + $140,000] = $220,000sir, I don’t understand the third line where 10÷11
The fixed cost for above 11,000 units is 10% more than what it is for below 11,000 units.
So for every $100 before 11,000 it is 100 + (10% x 100) = $110 above 11,000.
Putting it the other way round, for every $110 above 11,000 it is $100 below 11,000.
So the total below 11,000 is 100/110 of the amount above 11,000.
100/110 is the same as 10/11 🙂
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