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The management accountant of a business has identified the following information:
Activity level 800 units 1,200 units
Total cost $16,400 $23,600
The fixed costs of the business step up by 40% at 900 units.
What is the variable cost per unit?
A $8.00
B $18.00
C $19.67
D $20.00how do you know when to use high low and when to use substitution method
The thinking is the same, but this question is testing that you understand what is happening rather than just having learned rules. (The examiner is always wanting to check understanding in relation to all topics in the syllabus).
Here, because fixed overheads change you cannot just use the basic rule (which assumes fixed overheads stay constant) and therefore have to use a bit of basic algebra.
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