Question

Desperado Corporation's relevant range of activity is 2.000 units to 7,000 units. When it produces and sells 5,000 units, its average costs per unit are as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Fixed selling expense Fixed administrative expense Sales commissions Variable administrative expense Average Cost per Unit $6.60 $3.65 $1.55 $2.80 $0.70 $0.40 $0.50 $0.45 If 4,000 units are sold, the total variable cost is closest to: Multiple Choice $51000 $8.000 O $36,400 $10,000

Answer 1

Variable cost tend to vary with the volume of activity. Any increase in the volume of activity results in an increase in the variable cost and decrease in volume of activity results in decrease in the variable cost.

Total Variable cost per unit is as below.

Direct Material Direct Labour Variable Manufacturing overhead Sales Commission Variable administrative expenses Variable cost P.U Cost P.U 6.60 3.65 1.55 0.50 0.45 12.75

Total variable cost = $ 51,000 (4,000*12.75).