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Hello ACCA tutors .. could you please assist on this ?
Question:
An organisation has the following total costs at the three activity levels:Activity level( units) 4,000 6,000 7,500
Total costs $40,800 $5000$ 54800Variable costs per unit us constant within this activity range and there is a step up of 10% in the total fixed costs when the activity level exceeds 5500 units.
What is the total cost at an activity level of 5,000 units?- Topics: 1
- Replies: 12
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your fixed cost is 24.800 and v.c=4
at 5000
tc= f.c+vc
tc= 24800+(5000*4)
tc=24800+20000
tc=44800.Thank you sir for your response but it is the fixed cost calculation that is exactly my problem .. how did you arrive at the 24800 as fixed cost?
If you wish for me to answer then you must ask in the Ask the Tutor Forum.
Here’s the solution:
FC steps up when activity crosses 5500 units, that means activity levels of 7,500 & 6,000 have same FC, with an increase of 10%.
Using High-Low method, we can compare any two levels where TFC is same in order to find out the VC/unit & hence go further easily.VC/Unit = ($54,800-50,000)/(7,500-6,000) = $3.2
For Activity ,4000:
TVC = $3.2 x 4,000 = $12,800
TFC = TC – TVC = $40,800-12,800 = $28,000Note that this is the fixed cost unchanged till 5,500 units. When Acitivity crosses 5,500 units, Fixed cost will be 10% more than this basic one, i.e. TFC = $28,000 + $28,000 x 10% = $30,800
For Activity 6,000:
TVC = $3.2 x 6,000 = $19,200
TFC = TC – TVC = 50,000 – 19,200 = $30,800 (10% more than basic)
Verified.Hope it helped you.
Thank you so much Mr. John Moffat. This means Musti ($44,800) was wrong and according to your workings , it therefore means the correct answer to the question will ;
Total cost for activity level of 5000 units = tfc + tvc( 28000+ 3.2*5000) = 28000+16000
= $44000I don’t really know why you are thanking fee, because I said to ask in the Ask the Tutor forum.
However, the correct answer is indeed 44,000 🙂
(There is actually no need to calculate the fixed cost anyway. Using high low on 6,000 and 7,500 units gives a variable cost per unit of $3.20.
Since 5,000 units will have the same fixed cost as 4,000 units, the only difference in total cost will be the extra variable cost of an extra 1,000 units.
So total cost is 40,800 + (1,000 x 3.20) = $44,000 )@johnmoffat
Sir, the ultimate ‘thank you’ had to be for you anyway, so he has done it quite rightly by skipping me 😉
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