Question

b) Production and cost data of Akoo Ltd have been recorded over two years thus: Last year Current year Production 60,000 units 64,000 units Total costs (GH¢) 1,820,000 1,961,400 Between last year and the current year, there has been 5% cost inflation. Required i) Calculate the real fixed and variable costs ii) Estimate what total cost will be next year when it is expected that there will be a 4% cost push inflation and output will be 70,000 units.

Answer 1

b)

¡) The Real Fixed Cost is ¢1100000 and the Variable Cost ¢768000

¡¡) Next year Total cost with expected inflation of 4% is ¢2118480 for 70000 units

Explanation and Calculation

Real cost are the cost without inflation and have no inflation added and its Nominal cost includes Inflation

Hence ,first we have to find Cost of Current year Without Inflation

By Formula

NC = RC (1+ I)

Where NC is nominal cost

RC is Real Cost

I is Inflation Rate

Or by direct way we can say that current cost is (100+5 ) = 105% of Last year cost

Current Year Data

1961400= RC( 1+0.05)

Current yearReal Cost = 1961400/1.05

CURRENT YEAR Real COST = ¢1868000

Formula for Variable Cost = Difference in Total Cost / Difference in Output

=(1868000-1820000) / (640000-60000)

=¢12 per unit

Hence Real Variable Cost = 64000×12 =¢768000

Fixed Cost = Total Real Cost of Current Year - Variable Cost =1868000-768000 =¢ 1100000

ii) Total cost in second year when cost push inflation is 4% (this cost will include current year inflation in its cost)

{(70000×12(1.05)+1100000(1.05)}×1.04

=(882000+1155000)×1.04

=2037000×1.04

=¢2118480