Pedregon Corporation has provided the following information: If 3,000 units are sold, the total variable cost is closest to:
A) $46,800
B) $55,500
C) $42,150
D) $37,200

Question

Pedregon Corporation has provided the following information:  If 3,000 units are sold, the total variable cost is closest to:
A) $46,800 
B) $55,500 
C) $42,150 
D) $37,200

Quizplus · Accepted Answer

The given information does not provide a breakdown of fixed and variable costs, so we need to use the contribution margin approach to solve the problem.

Contribution margin per unit = selling price per unit - variable cost per unit
= $23 - $10
= $13

Total contribution margin = contribution margin per unit x number of units sold
= $13 x 3,000
= $39,000

Total variable cost = total contribution margin - total fixed cost
We do not know the total fixed cost, but we can use the information given to find the break-even point:

Break-even point (in units) = total fixed cost / contribution margin per unit
= 22,000 / 13
≈ 1,692.31

Since the break-even point is between 1,500 and 2,000 units, we can assume that the fixed cost is about $22,000.

Total variable cost = $39,000 - $22,000
= $17,000

However, the question asks for the total variable cost when 3,000 units are sold. We can use the high-low method to estimate the variable cost per unit:

Highest activity level:
Units sold = 4,000
Total cost = $52,800
Fixed cost = $22,000
Variable cost = total cost - fixed cost
= $52,800 - $22,000
= $30,800
Variable cost per unit = variable cost / units sold
= $30,800 / 4,000
= $7.70

Lowest activity level:
Units sold = 2,000
Total cost = $32,800
Fixed cost = $22,000
Variable cost = total cost - fixed cost
= $32,800 - $22,000
= $10,800
Variable cost per unit = variable cost / units sold
= $10,800 / 2,000
= $5.40

Using the highest and lowest activity levels, we can estimate the variable cost at the 3,000-unit level:

Variable cost at high level + [(Variable cost per unit) x (Actual activity level - High level)]
= $30,800 + ($7.70 x (3,000 - 4,000))
= $30,800 - $7,700
= $23,100

Therefore, the closest estimate of the total variable cost at the 3,000-unit level is $23,100, which is closest to choice C ($42,150 is the closest answer choice to $23,100).

Pedregon Corporation Has Provided the Following Information: If 3,000