The following chart shows three different costs: Cost A, Cost B, and Cost C. For each cost, the chart shows the total cost and cost per unit at two different volumes within the same relevant range. Based on this information, identify each cost as fixed, variable, or mixed. Explain your answers.

At 1,000 units At 4,000 units

Total Cost Cost per Unit Total Cost Cost per Unit

Cost A $75,000 $ 75.00 $ 75,000 $ 18.75

Cost B $6,000 $ 6.00 24,000 $ 6.00

Cost C $32,00 $ 32.00 68,000 $ 17.00

Question

Business

Joshua Wolfe

2 November, 17:05

The following chart shows three different costs: Cost A, Cost B, and Cost C. For each cost, the chart shows the total cost and cost per unit at two different volumes within the same relevant range. Based on this information, identify each cost as fixed, variable, or mixed. Explain your answers.

At 1,000 units At 4,000 units

Total Cost Cost per Unit Total Cost Cost per Unit

Cost A $75,000 $ 75.00 $ 75,000 $ 18.75

Cost B $6,000 $ 6.00 24,000 $ 6.00

Cost C $32,00 $ 32.00 68,000 $ 17.00

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Answers (1)

Know the Answer?

Jared Olsen · Answer 1

Cost A is a fixed cost as it is constant in total on both levels of activity.

Cost B is a variable cost as the cost per unit is constant at both activity levels.

Cost C is a mixed cost as it is neither constant in total nor on per unit basis.

Explanation:

A fixed cost is a cost that remains constant at each activity level within a relevant range or under short period of time. This is a cost which is incurred even if no unit is produced or sold. The fixed cost per unit falls as the activity level increases.

A variable cost is a cost that varies or changes with changes in activity level. The variable cost per unit remains constant within a relevant range or under short period of time. This cost is not incurred if no unit is produced or sold.

A mixed cost is a cost which has an element of both the fixed and the variable cost. The variable cost per unit under a mixed cost can be calculated by subtracting the fixed cost from the total mixed cost.

Cost A is a fixed cost as the total cost is constant at both activity levels of 1000 units and 4000 units. Besides, cost per unit is falling as volume increases.

Cost B is a variable cost as, although the total cost is increasing with increase in volume, the cost per units is constant.

Cost C is a mixed cost as it is neither fixed in total nor in per unit. It is a mixed cost with a variable element of $12 per unit and total fixed element of $20000.

Cost C, Variable cost per unit = (68000 - 32000) / (4000 - 1000) = 12 per unit

Total Fixed cost element of cost C = 68000 - (4000 * 12) = $20000