The correct answer is:
|
|
29,000 units |
35,000 units |
|
B |
$163,000 |
$211,000 |
Step 1Find the highest and lowest levels of activity (note that this is the activity level and is not necessarily the highest and lowest cost).
In this case we only have two levels of activity so we have to use those.
Step 2Compare the activity level and costs for each of these but deduct the extra step up fixed cost for 34,000 units
|
|
Number of
units |
Cost
$ |
|
Highest |
34,000 |
208,000-30,000=178,000 |
|
Lowest |
28,000 |
160,000 |
|
|
Increase |
6,000 |
18,000 |
|
This shows that for an increase in 6,000 units there has been a cost increase of $18,000. Therefore the variable cost per unit can be estimated as:
|
Variable rate of increase |
= |
$18,000/6,000 units |
|
|
= |
$3 per unit |
Step 3We can now find the fixed element of the cost at each activity level, by substituting the variable rate into the activity levels, with the fixed element appearing as the balancing figure.
Fixed cost at 28,000 units = £160,000 - (28,000 x $3) = $76,000
Fixed cost at 34,000 units = £208,000 - (34,000 x $3) = $106,000
Notice that the fixed cost at 34,000 units is $30,000 higher than at 28,000 units. This is reassuring as we were told this originally. Alternatively to find the fixed cost at 34,000 units we could have just calculated the fixed cost at 28,000 units and then added on the extra $30,000.
Cost at 29,000 units = $76,000 + (29,000 x $3) = $163,000
Cost at 35,000 units = $106,000 + (35,000 x $3) = $211,000
