Palmer Inc.currently produces 110,000 units at a cost of $440,000.Next year Palmer Inc.expects to produce 115,000 units.Palmer's relevant range is 100,000 to 120,000 units.If the cost is variable and 115,000 units are produced, the cost _____.
A)will stay the same
B)will increase to $460,000
C)will decrease
D)will be indeterminate

Question

Quizplus · Accepted Answer

Given that the cost is variable and directly proportional to the number of units produced, an increase in production from 110,000 units to 115,000 units (a 4.55% increase) would similarly increase the cost. The original cost for 110,000 units is $440,000, so for 115,000 units, the cost increases proportionally. Calculating the cost per unit ($440,000 / 110,000 units = $4 per unit) and then applying it to 115,000 units ($4 * 115,000 units) results in $460,000.