i am a little bit confused about this question can you please show me how to answer it :
An organization has the following total costs at two activity levels:
Activity level (units) 8,000 13,000
Total costs (£) 22,000 31,000
Fixed costs are constant in this range of activity and variable cost per unit
decreases by £1.5 per unit when activity exceeds 12,000 units.
Required:
What is the total cost at an activity level of 16,000 units?
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11y ago#1You need to use a little bit of algebra!
If V is the variable cost per unit for levels above 12,000 units, and if F is the fixed cost,
then
At the low figures:
8,000 (V + 1.5) + F = 22,000
So 8,000V + 12,000 + F = 22,000
8,000V + F = 10000
Using the high figures:
13,000V + F = 31,000
If you subtract the equation before from this equation then:
5,000V = 21,000
So V = 21,000/5,000 = 4.20
We know that the cost of 13,000 is $31,000
For 16,000 (an extra 3,000) there will be the extra variable cost of the extra 3,000.
So....31,000 + (3,000 x 4.20) = 43,600
why you didn't calculate the fixed cost and do this :
We know that the cost of 13,000 is $31,000
For 16,000 (an extra 3,000) there will be the extra variable cost of the extra 3,000.
So….31,000 + (3,000 x 4.20) = 43,600
11y ago#3by all means calculate the fixed cost - the answer will be the same. However since the fixed cost will not change it is faster to do what I need (and half the problem in the exam is the time pressure) .
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