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Why do I have to use $56000 (total costs from period 2 including extra fixed cost) to calculate the fixed cost = $35000?
At first I used total costs of period 1 = $44000 and got the fixed cost = $29000. And if I use total costs of $50000 ($56000 – $6000) from period 2 then I also get the fixed cost = $29000
Please explain why I was wrong.
Thank you in advance.
I do not have the BPP study text (only the Revision Kit), and so without seeing the full question I am unable to help you.
Have you watched our free lectures on this? The lectures are a complete free course for Paper F2 and cover everything needed to be able to pass the exam well.
I did watch your lectures on this topic before coming to the question bank in the textbook.
Question 19, there is an increase of in fixed cost when the level of activity reaches an exact amount.
Is it okay if I type the full question here?
OK type it (but when I have answered, reply that you are happy with the answer because then I will delete the question from here – because of copyright problems).
Square meters decorated: Period 1- 10000; Period 2 – 14000.
total cost: Period 1- $44000; Period 2 – $56000.when more than 12000 square meters are decorated, the fixed costs increase by $6000.
The total costs of 15500 square meters decorated is?
The difference between the 2 periods is $12,000. $6,000 of this is due to the extra fixed costs, and so the extra variable cost is the remaining $6,000.
Therefore the variable cost per unit is 6,000 / (14,000 – 10,000) = $1.50 per unit.
Since 15,500 units and 14,000 units will both have the same fixed cost, the cost for 15,500 units will be the same as that for 14,000 units plus the variable cost of the extra 1,500 units.
Therefore the total cost = 56,000 + (1,500 x $1.50) = 58,250
(The fixed costs at the lower level are 29,000, but when the sq metres is over 12,000 then the fixed costs are 6,000 higher at 35,000)
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