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The flexed budgets for two levels of activity are as follows:
Level 1 Level 2
Production (units) 10,000 20,000
Budgeted total cost $81,900 $126,060
The budgeted total cost figures reflect that there is a step-up in the total fixed cost of 15%, which occurs when production reaches 15,000 units. The variable production cost per unit remains constant in the range 10,000 to 20,000 units.What is the total cost associated with a flexed budget for 16,000 units of production?
A.$104,400
B.$108,396
C.$111,060
D.$114,057Sir in this question I calculated the variable costs and fixed cost by the high low method which gives VC=4.416 and fixed cost=37740, according to this i got option B as the answer, but the correct answer is Option C. Its from study hub and they have explained the answer as making two equations and solving it simultaneously, but i can’t understand why that, why high low method is incorrect here?
The high-low method is not applicable here because it typically estimates variable costs based on the highest and lowest activity levels without considering fixed cost step-ups.
In this case, the fixed costs change at a specific production level (15,000 units), which requires a more precise calculation using the equations derived from the budgeted costs.
Since the variable production cost per unit remains constant between 10,000 and 20,000 units, we can determine it from the budgeted costs at these levels.
For Level 1 10,000 units = Total cost of $81,900
For Level 2 20,000 units = Total cost of $126,060
The fixed costs increase by 15% when production reaches 15,000 units. Therefore, we can find the fixed costs for both levels of production. Which means 0.15 so the formulas are something like:
FC + 10,000V = 81,900
FC(1 + 0.15) + 20,000V = 126,060Solve the equations simultaneously
Calculate the total cost for 16,000 units
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