Nicklaus, Inc., currently produces 110,000 units at a cost of $440,000. Next year Nicklaus, Inc., expects to produce 120,000 units. Nicklaus' relevant range is 100,000 to 120,000 units. If the cost is variable and 120,000 units are produced, the cost:
A) will stay the same
B) will decrease
C) will be indeterminate
D) will increase to $480,000

Question

Quizplus · Accepted Answer

Variable costs change in direct proportion to the level of production. Since the cost for 110,000 units is $440,000, the cost per unit is $4. If production increases to 120,000 units, the total cost will increase to 120,000 units x $4/unit = $480,000.