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Hello Sir
Below is a question I have a doubt in
Q) The following observations of output and cost have been made:
Output (units) Cost
8,000 $39,400
20,000 $68,000
It is known that at output levels above 15,000 units, variable cost per unit drops by $1 per unit for all subsequent units produced.What is the variable cost for each unit of output above 15,000 units?
Select one:
$1·80
$0·97
$2·80
$3·40A) Since the variable cost is $1 lower per unit after 15,000 units, the total cost for 20,000 units must be adjusted first before using the high-low method.
Total cost for 20,000 = $68,000 + (20,000 – 15,000) units ´ $1 = $73,000.
Variable cost per unit (assuming no change in variable cost) = ($73,000 – $39,400) ÷ (20,000 – 8,000) units = $2.80
Variable cost per unit after 15,000 units is then $1 lower = $2.80 – $1.00 = $1.80.
Sir, wouldn’t the variable cost for 5,000 units already been adjusted in the figure, since this is what we assume for such questions.
Thank you in advance!
$1.80 is the correct answer, but I am not sure what you mean by your last sentence.
At the 8,000 unit level, the total variable cost will be 8,000 x 2.80 = 22,400 and the fixed cost will be 39,400 – 22,400 = 17,000
At the 20,000 unit level, the fixed cost will remain at 17,000. The variable cost for the first 15,000 units will be 15,000 x 2.80 = 42,000 and for the extra 5,000 units will be 5,000 x 1.80 = 9,000.
So the total cost will be 17,000 + 42,000 + 9,000 = 68,000.
(The reduction in the variable cost only applies to the units above 15,000)
Yes I did (and Simran showed the workings for it, which is why I did not repeat them 🙂 )
Sir, my doubt was wont we assume that the said variable cost has already been adjusted in the figures given to us
Why are we adjusting 20,000 units again?The $68,000 given for 20,000 units is the actual cost which includes some units at a higher variable cost per unit and some units at a lower variable cost per unit.
So to be able to use the high low method we have to restate the cost for 20,000 units as though all the units had the same variable cost per unit as at the 8,000 unit level.
sir why we add 5000 to 68000 and clarify adjustment Method= Total cost for 20,000 = $68,000 + (20,000 – 15,000) units ´ $1 = $73,000. clarify this process
The question clearly states” It is known that at output levels above 15,000 units, variable cost per unit drops by $1 per unit for all subsequent units produced.”
So since the variable cost is $1 “lower” per unit after 15,000 units, the total cost for 20,000 units must be adjusted first before using the high-low method.
We are given the cost for 20000 not 15000 so by doing the difference between 15000;& 20000 we have a true comparable total cost for 20,000
Total cost for 20,000 = $68,000 + (20,000 – 15,000) units at $1 = $73,000.
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