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An organisation has the following total costs at three activity levels:
Activity level (units) 8000 12,000 15,000
Total cost $204,000 $250,000 $274,000Variable 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?
A: $220,000
B: $224,000
C: $227,000
D: $234,000Sir i have confusion in this question, the kaplan kitt specifies the answer that is:
Variable cost per unit= $274,000-$250,000/15,000-12000= $8
What I don’t understand why aren’t they deducting from $204,000 rather than $250,000? since high low method tells you to select the highest and lowest cost/activity, so lowest would be 204,000
12,000 and 15,000 are the highest and lowest levels of production for which the fixed costs ate at the higher value.
can someone please explain this question as i am also confused with the step cost thing, thanks
Part of the reason that the costs for 12,000 and for 15,000 units are higher than the costs for those for 8,000 units is because those two have a higher fixed cost.
By just using 12,000 and 15,000 for the high low technique the fixed costs in both are the same, and so the difference in the total costs is purely due to the extra variable costs of the extra units.
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