Question

In: Accounting

Dubai Corporation’s maximum capacity in operation cycle is around 14,900 units per year, against total costs...

Dubai Corporation’s maximum capacity in operation cycle is around 14,900 units per year, against total costs of $875,000 and the lowest one is 6,000 units with a corresponding total cost of 60% of the high point. The fixed costs constitute of a significant portion.

Required:

1. Find out the variable cost per unit as spelled out by the HLM. Provide proof evidence as reflected by fixed cost under high point and low point of operation.

2. What would be the case if the associated costs of the high point reduced by 20 percent. Other things remain the same. Give a comparison in calculation between the results derived from part one and part two.

Expert Solution

1) Total Cost at lowest activity level = $ 875,000 X 60% = $ 525,000

Variable cost per unit = [ Total Cost at highest activity level - Total Cost at lowest activity level ] / [ Outputs at Highest activity - Outputs at lowest activity ]

Variable cost per unit = [ $ 875,000 - $ 525,000] / [ 14,900 - 6,000 ]

Variable cost per unit = $ 350,000 / 8,900 = $ 39.32584( Approximately)

Calculation for fixed cost under highest and lowest level of activity :

Fixed cost at highest level of activity = Total cost at highest activity - [ Variable cost per unit X Outputs at highest level of activity ]

Fixed cost at highest level of activity = $ 875,000 - [ $ 39.32584 X 14,900 ] = $ 289,045

Fixed cost at lowest level of activity = Total cost at lowest level of activity - [ Variable cost per unit X Outputs at lowest level of activity ]

Fixed cost at lowest level of activity = $ 525,000 - [ $ 39.32584 X 6,000 ] = $ 289,045

2) Revised total cost at highest level of activity = $ 875,000 X ( 100 - 20 )% = $ 700,000

Total cost at lowest level of activity = $ 700,000 X 60% = $ 420,000

Variable cost per unit = [ Total cost at highest level of activity - Total cost at lowest level of activity ] / [ Output at highest level of activity - Output at lowest level of activity ]

Variable cost per unit = [ $ 700,000 - $ 420,000 ] / [ 14,900 - 6,000 ] = $ 31.46067 (Approximately)

Calculation for fixed cost at highest and lowest level of activity :

Fixed cost at highest level of activity = Total cost of highest level of activity - [ Variable cost per unit X Outputs at highest level of activity ]

Fixed cost at highest level of activity = $ 700,000 - [ $ 31.46067 X 14,900 ] = $ 231,236

Fixed cost at lowest level of activity = Total cost at lowest level of activity - [ Variable cost per unit X Outputs at lowest level of activity ]

Fixed cost at lowest level of activity = $ 420,000 - [ $ 31.46067 X 6,000 ] = $ 231,236

	Highest level of activity		Lowest level of activity
	Variable cost per unit	Fixed cost	Variable cost per unit	Fixed cost
A	39.32584	289,045	39.32584	289,045
B	31.46067	231,236	31.46067	231,236

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