Question

Cost behavior. VW has determined the following cost information at a volume of 16,000 units: Total variable expenses = $108,000 and average cost = $13.00. Assuming 40,000 units is within the relevant, compute TOTAL cost at a volume of 40,000 units.

Answer 1

Relevant Range: The term Revlevant Range is used for Fixed Costs. IT refers that the normal range of the production or the activity will not change the total fixed costs of the business as the volume or the ctivity changes. It means fixed costs does not change if the production is within the relevant range.

Given, the cost of variable expenses = $108,000 at 16,000 units volume.

Average cost = $13

Calculation of Total Fixed Costs:

Average Cost = Total cost of Production / Quantity of units produced

Average Cost = (Total Variable costs + Total Fixed costs) / Quantity of units produced

$13 = ($108,000 + Total Fixed Costs) / 16,000

($13 * 16,000) = ($108,000 +Total Fixed Costs)

$208,000 = $108,000 +Total Fixed Costs

$208,000 - $108,000 = Total Fixed Costs

Total Fixed Costs = $100,000

Calculation Variable Cost per unit

Variable Cost per unit = Total Varibale Costs / Total Units Produced

= $108,000 /16,000

Variable Cost per unit = $6.75

Calaculation of Total Costs at a volume of 40,000 Units

Total Costs = Variable Costs + Fixed Costs

= (Units Produced * Total Variable Cost per Unit) + Total Fixed Costs

= (40,000 * $6.75) $100,000

= $270,000 + $100,000

Total Costs = $370,000

Hence, total Costs at a volume of 40,000 units is $370,000