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Dear tutor,
An organisation has the following costs at three activity
Activity level 4000 6000 7500
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 cost when the activity level exceeds 5500 units.
what is the total cost at an activity level of 5000 units?
a 44.000
b 44.800
c 45.000
d 46.800solution
vc = (54.800-50.000) ÷ (7.500 – 6.000) = 3.20
total fixed cost above 5.500 units = 54.800- (7.500 x 3.20) = 30.800
total fixed cost below 5.500 units = 30.800/110 x 100 = 28.000
total cost for 5.000 units = (5.000 x 3.20) + 28.000) = 44.000My question is simple but I do not understand. Please, could you explain why the 30.800 has to be divided by 110 and multiplied by 100?
Probably it is a silly question but I do not get it!
Thanks a lot for your help!
Since the fixed cost increases by 10% for levels above 5,500 units, it means that for every $100 of fixed costs for levels below 5,500 it becomes $100 + 10% = $110 at levels above 5,500.
Putting it the other way round, for every 110 fixed costs at the higher level it would be 100 at the lower level.
So if they are 30,800 at the higher level, then they will be 100/110 at the lower level.
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