The following table provides information about a company's production.
If variable costs increased in 2005 by 10 per cent and fixed overheads increased in 2006 by 20 per cent, what was the estimated total cost in 2006?
A) $447 600
B) $472 800
C) $504 200
D) More than $514 400

Question

The following table provides information about a company's production. 
If variable costs increased in 2005 by 10 per cent and fixed overheads increased in 2006 by 20 per cent, what was the estimated total cost in 2006?
A) $447 600 
B) $472 800 
C) $504 200 
D) More than $514 400

Quizplus · Accepted Answer

To find the estimated total cost in 2006, we need to calculate the total cost in 2005 and then adjust for the increase in variable costs and fixed overheads.

Total cost in 2005 = Cost of raw materials + Direct labour cost + Variable overhead cost + Fixed overhead cost
Total cost in 2005 = $120,000 + $150,000 + $30,000 + $150,000
Total cost in 2005 = $450,000

Increase in variable costs in 2005 = 10%
New variable overhead cost in 2005 = $30,000 + ($30,000 x 10%) = $33,000

Increase in fixed overheads in 2006 = 20%
New fixed overhead cost in 2006 = $150,000 + ($150,000 x 20%) = $180,000

Estimated total cost in 2006 = Total cost in 2005 + Increase in variable costs in 2005 + Increase in fixed overheads in 2006
Estimated total cost in 2006 = $450,000 + $3,000 + $30,000
Estimated total cost in 2006 = $483,000

The closest answer to this calculated value is C) $504,200, so the best choice is C.

The Following Table Provides Information About a Company's Production