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Hi,
Could you please help me to understand below question.An organisation has the following total costs at three activity levels:
Activity unit 4,000 – 6,000 – 7,500
Total Cost $40,800 – $ 50,000 – $ 54,800Variable 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 5,500 units.
what is the total cost at an activity level of 5,000 units?
a) $44,000
b) $44,800
c) $45,400
d) $46,800My difficulties is to calculate the 10% of Step up cost. If 10% should be calculated on the fixed cost, how can I calculate the amount of fixed cost?
Thank you
Gabbi
You do not actually need to calculate the fixed cost, as you will see below.
If you take the 6,000 and 7,500 activity levels, then they will both have the same fixed cost because they are both more than 5,500 units.
So doing normal high/low on these gives you:Variable cost per unit = (54800 – 50000) / (7500 – 6000) = 3.20
At an activity level of 5,000, the fixed costs will be the same as for an activity level of 4,000 units. So the only difference in total cost will be the extra variable cost of the extra 1,000 units.
So the total cost = 40,800 + (1000 x 3.20) = $44,000
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