Question

Total production costs for Gallop, Inc., are budgeted at $230,000 for 50,000 units of budgeted output and at $280,000 for 60,000 units of budgeted output. Because of the need for additional facilities, budgeted fixed costs for 60,000 units are 25% more than budgeted fixed costs for 50,000 units. How much is Gallop's budgeted variable cost per unit of output?

Answer 1

Answer:

$3

Explanation:

We have to use linear function to determine the variable cost per unit.

Let, x = fixed costs, y = variable cost per unit

According to the question,

x + 50,000 y = $230,000 ........ (i)

As the fixed cost increases 25% due to additional facilities, the new equation will be -

(x*25%) + x + 60,000 y = $280,000

or, 0.25x + x + 60,000 y = $280,000

or, 1.25 x + 60,000 y = $280,000 ......... (ii)

Multiplying the equation (i) by 1.25 and the equation (ii) by 1, we can get,

1.25x + 62,500 y = $287,500 ...... (iii)

1.25x + 60,000 y = $280,000 ......(iv)

Subtracting equation (iv) from (iii), we can get,

2,500 y = $7,500

or, y = $7,500 ÷ 2,500

or, y = $3

Therefore, the budgeted variable cost per unit = $3