A company that produces and sells a single product has provided the following vo

Question

A company that produces and sells a single product has provided the following volume and average cost data for two accounting periods:

Level of activity (units) ------------------------ 1000    2000
Direct Materials ---------------------------------    4$       4$
Direct Labor      --------------------------------     3$       3$
Manufacturing overhead -----------------------  $3.50   $2.50
General, selling, administrative expenses ---- $1.00   $0.50

The best estimates of the total fixed cost and variable cost per unit are closest to:
1) $2,000 fixed; $1.50 variable
2) $2,000 fixed; $7.00 variable
3) $3,000 fixed; $7.00 variable
4) $3,000 fixed; $8.50 variable

Well answer is 4) according to the program. (It's a program from CD, not a textbook). I just don't know how they got 4) as answer.


Well, I know Direct Material, Direct Labor, Manufacturing overhead is part of variable costs according to Chapter2. so for 1000 units, total variable cost per unit is 4+3+3.5= 10.5 I think..
I also think administrative expense is fixed cost if it has to do with rental administrative expenses. So in case of 1000 units, it's 1000x1$= 1000. I don't know how 3000$ is the answer. I am really confused.





A company that produces and sells a single product has provided the following volume and average cost data for two accounting periods: Level of activity (units) ------------------------ 1000    2000 Direct Materials ---------------------------------    4$       4$ Direct Labor      --------------------------------     3$       3$ Manufacturing overhead -----------------------  $3.50   $2.50 General, selling, administrative expenses ---- $1.00   $0.50
The best estimates of the total fixed cost and variable cost per unit are closest to:
1) $2,000 fixed; $1.50 variable
2) $2,000 fixed; $7.00 variable
3) $3,000 fixed; $7.00 variable
4) $3,000 fixed; $8.50 variable

Well answer is 4) according to the program. (It's a program from CD, not a textbook). I just don't know how they got 4) as answer. Well, I know Direct Material, Direct Labor, Manufacturing overhead is part of variable costs according to Chapter2. so for 1000 units, total variable cost per unit is 4+3+3.5= 10.5 I think..
I also think administrative expense is fixed cost if it has to do with rental administrative expenses. So in case of 1000 units, it's 1000x1$= 1000. I don't know how 3000$ is the answer. I am really confused.

Explanation / Answer

We first calculate the total OHs at two volumes So for 1000 units, Total OH = (3.5+1)*1000 = 4500 For 2000 units, Total OH = (2.5 +0.50)*2000 = 6000 Using High Low method, we state that for a 1000 unit increase, the OH increase by (6000-4500) = 1500. So Var OH is 1500/1000 = $1.50 pu If Var OH is 1.5 pu, for 100 units, Total Var OH = 1.5*1000 = 1500. So Fixed OH = Total OH - Var OH = 4500 -1500 = 3000 At 2000 units, Var OH = 2000*1.5 = 3000. So Fixed OH = Total OH-Var OH = 6000-3000=3000. So Var cost pu = DL+ DM + Var OH = $4+$3+$1.50 = $8.50 Thus ans is 4) $3,000 fixed; $8.50 variable

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