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- 5 Marks
Question
Komosa Ltd is reviewing the selling price of its product for the coming year. A forecast of the annual costs that would be incurred by Komosa Ltd in respect of this product at differing activity levels is as follows:
| Annual production (unit) | 100,000 | 160,000 | 200,000 |
|---|---|---|---|
| Direct materials (GH¢000) | 200 | 320 | 400 |
| Direct labour (GH¢000) | 600 | 960 | 1,200 |
| Overhead (GH¢000) | 880 | 1,228 | 1,460 |
The cost behavior represented in the above forecast will apply for the whole range of output up to 300,000 units per annum of this product.
Required:
i) Calculate the total variable cost per unit and total fixed overhead. (4 marks)
ii) State the total cost function. (1 mark)
Answer
i) Total Variable Cost per Unit and Total Fixed Overhead:
- Material Cost:
GH¢ 200,000 / 100,000 units = GH¢ 2 per unit - Labour Cost:
GH¢ 600,000 / 100,000 units = GH¢ 6 per unit - Variable overhead cost:
Using high-low method:
(GH¢ 1,460,000 – GH¢ 880,000) / (200,000 units – 100,000 units) = GH¢ 5.8 per unit - Total variable cost per unit:
GH¢ 2 (materials) + GH¢ 6 (labour) + GH¢ 5.8 (overhead) = GH¢ 13.8 per unit - Fixed cost:
Using the cost at 200,000 units:
Total cost = GH¢ 1,460,000
Variable cost = 200,000 units * GH¢ 13.8 = GH¢ 1,380,000
Fixed cost = Total cost – Variable cost = GH¢ 1,460,000 – GH¢ 1,380,000 = GH¢ 300,000
(4 marks)
ii) Total Cost Function:
Total cost function: Y = GH¢ 300,000 + GH¢ 13.8x
- Tags: Cost behavior, Cost Function, Fixed Costs, High-Low Method, Variable Costs
- Level: Level 2
- Topic: Cost-Volume-Profit (CVP) Analysis
- Series: MAY 2019
- Uploader: Joseph