Question

	Units	Per unit cost	Total cost
5,000 units	5000	17.00	85000
7,500 units	7500	13.00	97500
Difference	2500		12500
Unit variable cost	5	=12500/2500
Fixed cost	60000	=85000-(5000*5)
Y = $60,000 + $5X

what is that X suppose to mean ?is the answer 60,005?

Answer 1

CALCULATION OF FIXED COST AND VARIABLE COST:

TOTAL COST = FIXED COST + VARIABLE COST

VARIABLE COST PER UNIT = CHANGES IN TOTAL COST / CHANGES IN UNITS

STEP 1- VARIABLE COST:

Variable cost per unit = ($97500 - $85000) / (7500 - 5000)

                                       = $12500 / 2500

Variable cost per unit = $5 per unit

STEP 2- FIXED COST:

Equation: Y = a + bX

Total cost = Fixed cost + Units * variable cost per unit

Y = Total cost a = Fixed cost b = units X = Variable cost per unit

Y = $85000

a = Fixed cost

b = 5000 Units

X = $5 per unit

Y = a + bX

Therefore, $85000 = Fixed cost + 5000 units * $5 per unit

                    $85000 = Fixed cost + $25000

Fixed cost = $85000 - $25000 = $60000

Check:

Substitute in equation Y = a + bX, You will get Total cost of $85000

Y = $60000 + 5000 units * $5 per unit

Y = $60000 + $25000

Therefore, Total Cost = $85000

Alternatively, Fixed cost and variable cost can also be computed with 7500 units

Y = a + bX

$97500 = Fixed cost + 7500 units * $5 per unit

$97500 = Fixed cost + $37500

Fixed cost = $97500 - $37500 = $60000

Check:

Total cost = $60000 + 7500 units * $5 per unit

Total Cost = $60000 + $37500

Total Cost = $97500

Note:

1. Variable cost is constant per unit and varies in total.

2. Fixed cost is constant in total and varies in per unit.

All the best...