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Hello Sir, please could you assist on this question…The method used on the answer was not really understood, please i need your simple method.
Question:
An organisation has the following total costs at two activity levels:
Activity level (units) 16000 22000
Total costs($) 135000 170000Variable costs per unit is constant within this range of activity but there is a step up of $5,000 in the total fixed costs when the activity exceeds 17,500 units.
The method used on the answer was not really understood, please i need your simple method.
The difference between the two total costs is 170,000 – 1350,000 = 35,000. Part of the reason is the higher fixed costs, and therefore the extra variable costs are 35,000 – 5,000 = 30,000
This is the extra variable cost for an extra 22,000 – 16,000 = 6,000 units, and therefore the variable cost per unit = 30,000 / 6,000 = $5 per unit.
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