The following extract is taken from the production cost budget of S Co.
Production (units)
2,000
3,000
Production cost ($)
11,100
12,900
What is the budget cost allowance for an activity level of 4,000 units?
The correct answer is: $14,700
High activity
Low activity
Increase
= $1.80 per unit
Fixed cost, substituting in high activity
= $12,900 - (3,000 x $1.80)
= $7,500
Budget cost allowance for 4,000 units:
Variable cost (4,000 x $1.80)
Fixed cost
$7,200 is the variable cost allowance only and $7,500 is the fixed cost allowance only. If you selected $13,460 your variable cost per unit calculation was upside down ($1,000/1,800 instead of $1,800/1,000).
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