Grundmann Inc. reports that at an activity level of 6,500 machine-hours in a month, its total variable inspection cost is $487,110 and its total fixed inspection cost is $326,040.
-What would be the total variable inspection cost at an activity level of 6,600 machine-hours in a month? Assume that this level of activity is within the relevant range.
A) $494,604
B) $331,056
C) $487,110
D) $813,150

Question

Quizplus · Accepted Answer

The total variable inspection cost is a variable cost, which means that it changes in direct proportion to changes in the level of activity. The total fixed inspection cost, on the other hand, remains constant within the relevant range of activity. Therefore, to calculate the total variable inspection cost at an activity level of 6,600 machine-hours in a month, we can use the following formula:

Total Variable Inspection Cost = (Variable Inspection Cost per Machine-Hour x Activity Level) + Total Fixed Inspection Cost

To find the variable inspection cost per machine-hour, we can use the given information:

Variable Inspection Cost per Machine-Hour = Total Variable Inspection Cost / Activity Level
= $487,110 / 6,500 machine-hours
= $75.0938 per machine-hour

Now we can plug these values into the formula to calculate the total variable inspection cost at an activity level of 6,600 machine-hours in a month:

Total Variable Inspection Cost = ($75.0938 per machine-hour x 6,600 machine-hours) + $326,040 fixed cost
= $496,566 + $326,040
= $822,606

Therefore, the best answer is A) $494,604, which is the closest option to the calculated value.