Starting ECR trying to get to grips with semi variable costs!

Amy121088

Hello
#
I'm new here could anyone help me with the following?

3000 units cost £11,500
4000 units cost £14500.

what will the labour cost be if we made 5000 units.

Is there a particular formula i need to use? im hoping to start ECR in Sept and im trying to get a head start.

Its about semi varaible costs.

Any help or advice much apprectiated.

Andrea

Semi variable cost are costs that are both fixed & variable. For example a mobile phone contract. The line rental is fixed but the extra call charges are variable depending on the amount of calls you make.

For the problem you posted, you need to use the high low method. So minus the lowest cost (£11,500) from the highest (£14,500) to get the difference. Then do the same with the units...like this....

£14,500 - £11,500 = £3,000
4,000 - 3,000 = 1,000 units

Then divide the difference in cost between the difference in units...this will give you your variable cost per unit....

£3,000 / 1,000 = £3 per unit

Now you need to find the fixed cost. So use the data you already have. Take one of the costs and minus the units multiplied by variable cost per unit...like so....

£14,500 - (4,000 x 3) = £2,500 fixed cost

So for 5,000 units, 1st find the variable cost....

5,000 x £3 = £15,000

Then add the fixed cost....

£15,000 + £2,500 = £17,500

I'm hoping Ive remembered that all right, but Im sure someone will correct me if Im wrong :thumbup:

Amy121088

Thanks for that. Your breakdown really helped me understand how to calculate the semi varaible costs.


Amy