Yang Manufacturing makes a product called Yin. The relevant range of operations is between 2500 units and 10 000 units of Yin per month. Per unit costs at two activity levels are as follows: 5000 units at $17.00 per unit; 7500 units at $13.00 per unit. Determine the cost formula that expresses the behaviour of Yang's total costs:
A) Y $60 000 + $5X
B) Y $20 000 + $13X
C) Y $45 000 + $4X
D) Y $40 000 + $9X

Question

Quizplus · Accepted Answer

The cost formula is derived by identifying the fixed and variable costs. At 5000 units, total cost is $85,000 ($17 x 5000), and at 7500 units, total cost is $97,500 ($13 x 7500). The variable cost per unit is $5 (($97,500 - $85,000) / (7500 - 5000)). The fixed cost is $60,000 ($85,000 - $5 x 5000). Thus, the cost formula is Y = $60,000 + $5X.

Yang Manufacturing Makes a Product Called Yin