Answer (A) is correct . First, state the information known about the two production levels mathematically: Variable costs + Fixed costs = Total cost (75,000 × UVC) + (1.0 × FC) = $220,000 ? (100,000 × UVC) + (1.2 × FC) = $275,000 Next, state one of them in terms of fixed costs: (75,000 × UVC) + (1.0 × FC) = $220,000 FC = $220,000 – (75,000 × UVC) Substitute this relationship into the second equation and solve for the budgeted unit variable cost: (100,000 × UVC) + 1.2 ($220,000 – 75,000 UVC) = $275,000 (100,000 × UVC) + $264,000 – (90,000 × UVC) = $275,000 (10,000 × UVC) = $11,000 UVC = $1.10
Answer (B) is incorrect because The amount of $1.20 is not the budgeted variable unit cost.
Answer (C) is incorrect because Not using the 20% increase in fixed costs at the higher output level in the formula results in $2.20.
Answer (D) is incorrect because Total cost per unit at 100,000 units of output is $2.75.
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