The Meldrum Co. is analyzing a proposed project. The company expects to sell 3,000 units,give or take 15%. The expected variable cost per unit is $8 and the expected fixed costs are $12,500. Cost estimates are considered accurate within a plus or minus 5% range. The depreciation expense is $4,000. The sale price is estimated at $18 a unit,give or take 2%. The company bases its sensitivity analysis on the expected case scenario. The company conducts a sensitivity analysis using a variable cost of $9. The total variable cost estimate will be:
A) $22,950
B) $24,000
C) $25,500
D) $27,000
E) $31,050

Question

Quizplus · Accepted Answer

The expected variable cost per unit is $8, but the sensitivity analysis is conducted using a variable cost of $9 which is 12.5% higher than the expected variable cost. Thus, the total variable cost estimate can be calculated by multiplying the revised variable cost by the expected unit sales:

Variable cost per unit = $9
Expected unit sales = 3,000 units
Expected variable cost = $8 x 3,000 units = $24,000
12.5% increase = $24,000 x 12.5% = $3,000
Total variable cost estimate = $24,000 + $3,000 = $27,000

Therefore, the best choice is D.