Question

Make sure any calculations are clearly shown.

a) Complete the chart, showing manufacturing cost at various levels of production for Company X

Volume (units)		10,000	20,000	30,000	40,000
Cost A		$25,000	$25,000		$25,000
Cost B		$25,000	$50,000		$100,000
Cost C		$33,000	$48,000		$78,000
Unit cost		$8.30

b) What pattern do you observe in the behavior of unit cost? Explain briefly why this occurs.

c) Develop an equation in the form of Y = a +bX to forecast total manufacturing cost. Use this equation to forecast total costs at a level of 70,000 units.

d) Identify one reason why your forecast in c) may be unreliable.

Answer 1

a) Complete the chart, showing manufacturing cost at various levels of production for Company X

Volume (units)		10,000	20,000	30,000	40,000
Cost A		$25,000	$25,000	$25,000	$25,000
Cost B		$25,000	$50,000	$75,000	$100,000
Cost C		$33,000	$48,000	$63,000	$78,000
Total Cost		$83,000	$123,000	$163,000	$203,000
Unit cost		$8.30	$6.15	$5.43

b) The pattern that is observed in the behaviour of unit costs is that with increase in levels of activity, the unit costs reduce. This is because the fixed costs reduce per unit as the volume increases.

c) Equation: Y = a + bX

Y is total cost; a is fixed cost; b is variable cost per unit; X is no of units

1. Take costs of highest level of activity and lowest level of activity i.e. $203,000 @40,000 units and $83,000 @10,000 units

2. Determine the slope i.e. variable cost per unit = (203000-83000)/(40000-10000) = $4 p.u.

Thus, Total cost = variable cost + fixed cost

Equation : Y = a+bX

83000 = fixed cost + 4x10000

Fixed cost = 43000

Equation: Y = 43000 + 4X

Forecasting for 70000 units,

Y= 43000 + 4x 70000 = $323,000

d) This equation is sometimes unreliable because it only considers two extreme activity levels from a set of actual data of various activity levels and their corresponding total cost figures