Tricky Question.

[Saadique M]

Hi there, I came across this question and didnt understand half of it..here it is :-

An organisation has the following total costs at three activity levels:
Activity level(units) 8000 12000 15000
Total cost ($) 204,000 250,000 274,000

Variable cost per unit is constant within this activity range and there is a step up of 10% in the total fixed costs when the activity level exceeds 11,000units.

What is the total at an activity level of 10,000units?
a. 220,000
b. 224,000
c. 227,000
d. 234,000

answer is A...explain pls its a fav for exams

[sha-bee]

Hi there, I came across this question and didnt understand half of it..here it is :-

An organisation has the following total costs at three activity levels:
Activity level(units) 8000 12000 15000
Total cost ($) 204,000 250,000 274,000

Variable cost per unit is constant within this activity range and there is a step up of 10% in the total fixed costs when the activity level exceeds 11,000units.

What is the total at an activity level of 10,000units?
a. 220,000
b. 224,000
c. 227,000
d. 234,000

answer is A...explain pls its a fav for exams

Hmmm....I got it!If you understand the question, it get quite easy...

Level Of Activity Total Cost
8000.................... 204,000
12000 ................... 250,000
15000.................... 274,000

When units exceed 11,000, Fixed Cost (FC) increase by 10%

You've got to choose two level of activity in the list
We'll choose 12,000 and 15,000 since then the FC will be the same between them.

From 12,000 to 15,000, the level of activity has increased by 3,000units
From 250,000 to 274,000, cost has increased by 24,000

Since variable cost(VC) vary according to level of output, the amount increased is VC!
Hence, 3,000units/ 24,000 =8 (VC per unit)

VC for 12,000 units (you may choose 15,000 too since it's FC will be the same as for 12,000)
8x 12000= 96000
Therefore fixed cost= 250,000(it's total cost) - 96,000= 154,000

Since for 12,000 units FC had increased by 10%, 154,000= 100%+10%=110%
Fixed cost for outputs below 11,000= 154,000/110% X 100% =140,000

Calculation for total cost for 10,000 units

FC...............................140,000
VC (8X 10,000 units)....... 80,000
Total cost.....................220,000

Well, hope that help...yeah, i know..it's kinda complicated.:wink: