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Hi John,
Could ou please explain the below for me?
The question is :
total producton costs for 900untis of output are $58,200 and total production costs for 1200units are $66,600.
The VC per until is constant up to a productiob level of 2000uts per month but a step up of $6000 in he monthly total fixed cost occurs when production reaches 1100 untis per month.
what is the cost for a month when 1000 units are produced?The answer :
total cost at 1200units 66600- step increase (6000) =60600. total cost of 900 units 58200 therefore VC of 300 units 2400. VC per until $8.
total cost 900units 58200
VC 900units 7200
FX cots 51000then 51000+ (8×1000)= 59000
could you please explain why we deduct step increase of 6000? I dont underdtand the queston at all to be honest……
Thank you for your help,
Anna
This is using the basic high/low method (which is revision from Paper MA (was F2)).
The increase in the costs (from 58,200 to 66,600) can only be due to the extra variable costs of the extra units produce, plus the extra fixed costs of 6,000.
So the extra variable cost for the extra 300 units, must be the difference in total cost of $8,400, less the extra fixed costs of $6,000. So the variable cost per unit must be $2,400/300 = $8.
If you have forgotten how to do the high/low method, then do watch the relevant Paper MA free lectures.
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