Financial performance

lindas1967

Hi I am doing financial performance assignment 1 and I am stuck on task 1
The following cost have all been identified as semi variable
Analyse each item into the fixed cost element and variable cost per unit
Item 3000 units. 10000 units. Total fixed cost. Variable cost per unit
17750. 44000
9000. 24750
12900. 25500
How do I work this out please

SandyHood

Lindas1967
The method to use is called Hi-Lo
I put the figures into a table to help me



If you know for example that cost £17,750 to make 3,000 and £44,000 to make 10,000, you can calculate the extra cost of the extra units.

The extra 7,000 units [10,000 - 3,000] cost £26,250 to make. In other words we can say the average extra cost per unit as production goes up from 3,000 units is £3.75

The £17,750 we spend making 3,000 includes a fixed cost and a variable cost for each unit produced. The extra £3.75 we have identified is the variable cost per unit.

Knowing the variable cost of one unit we can multiply that figure by one of the production totals. I choose the 10,000 but you can do this sum using 3,000. In my case, the answer was £37,500.
This means that when we produce 10,000 units the total variable cost is £37,500.
We already know that the total cost [fixed + variable] for 10,000 units is £44,000
So the difference between these two amounts will be the fixed cost: £6,500

Do the same: take the 3,000 units x £3.75 and find the difference from the total cost of 3,000 units. I'm expecting £6,500 to be your answer too.

I hope this helps you.

lindas1967

Thank you for that