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An organization has the following total costs at three activity levels:
Activity level units 8,000. 12000. 15000
Total cost $ 204000. $250000. $274000Variable cost per unit is constant within thus activity range and there is a step up of 10% in the total fixed costs when activity level exceeds 11,000 units?
A. $ 220,000 correct answer
Please explain in detail. Thanks in advance
Requirement: what is the total cost at an activity level of 10,000 units. And $ 220,000 is the answer of this question
As u know that vcost increases as no of units increases so we can find the vcost per unit by taking the increase in units from 12000 to 15000 units which is 3000 units
we take the increase in cost between these two levels which is 24000
after dividing increase in cost by increase in units we get a vcost per unit of 8
we use 12000 and 15000 because both levels will have that extra 10% fixed cost added so both are comparable
after getting vcost per unit of 8 we can multiply this with our activity level of 8000 and we can calculate fixed cost of 140000
Now u know the fcost too so multiply 8 with ur req activity level of 10000 which equals $80000 and add fcost of $140000 to get total cost $220000 which is the correct answer as well 🙂
Hope this is helpfularsalanullah is correct, although you do not actually need to calculate the fixed costs.
You can calculate the variable cost per unit (as arsanullah has done) at $8 per unit.
We know the total cost for 8,000 is $204,000 from the question, and the only difference for 10,000 will be the extra variable cost of an extra 2,000 units (because the fixed cost will be the same for 8,000 and for 10,000 units).
So the extra cost is 2,000 x $8 = $16,000.
So the total cost is $204,000 + $16,000 = $220,000
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