Question

Vaughan Company had the following costs at two different levels of activity: MH Used 10,000 MH 15,000 MH September October Cost A $ 80,000 $120,000 Cost B $ 50,000 $ 65,000 Cost C $50,000 $50,000 If Vaughan Company expected to used 14,000 machine hours (MH) next month, what would they expect total costs (Cost A+ Cost B+ Cost C) to be?

Answer 1

Cost C is same at 10,000 machine hours and 15,000 machine hours. Hence, cost C is fixed cost. When machine hours are increased from 10,000 to 15,000, both cost A and Cost B change. Hence, Cost A and Cost B are either variable costs or mixed costs.

For Cost A

Variable cost per machine hour = Change in cost/ Change in machine hours

= (120,000-80,000)/(15,000-10,000)

= 40,000/5,000

= $8

for 10,000 machine hours, Cost A would be = 10,000 x 8

= $80,000

In the question, Cost A for 10,000 machine hours is given as $80,000, hence cost A is a variable cost.

for Cost B

Variable cost per machine hour = Change in cost/ Change in machine hours

= (65,000-50,000)/(15,000-10,000)

= 15,000/5,000

= $3

Total variable cost for 10,000 machine hours = 10,000 x 3

= $30,000

Total cost at 10,000 machine hours = $50,000

Hence, fixed cost portion in cost B = Total cost at 10,000 machine hours- Total variable cost for 10,000 machine hours

= 50,000-30,000

= $20,000

For 14,000 machine hours

Cost A= 14,000 x 8 = $112,000

Cost B = 20,000+14,000 x 3 = $62,000

Cost C = $50,000

Total cost = Cost A + Cost B + Cost C

= 112,000+62,000+50,000

= $224,000

Kindly comment if you need further assistance.

Thanks‼!