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Dear John,
Please be kind enough to elaborate the answer for the following question;
The following observations of output and cost have been made:
Output Cost
8,000 Units $ 39,400
20,000 Units $ 68,000It is known that at output levels above 15 000 units, variable cost per unit
drops by $1 per unit for all subsequent units produced.What is the variable
cost for each unit of output above 15 000 units?a. $1.80
??
b. $0.97
c. $2.80
d. $3.40For output of 20,000 units, the variable cost for 5,000 of them (the excess over 15,000) is $1 less than the ‘normal’ variable cost per unit.
Therefore if the cost per unit hadn’t fallen, the total cost for 20,000 units would be $5,000 higher and be $73,000.
If you then use the normal high low arithmetic with a cost of $73,000 for output of 20,000 units then you get a variable cost of $2.80 per unit.
This is what the variable cost is when ignoring the fall of $1. However the cost for each unit above 15,000 is $1 lower and is therefore $1.80.Thank you very much for the Distinct explanation.
I understand it completely now!
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