Question

Extron, Inc., has only variable costs and fixed costs. A review of the company's records disclosed that when 100,000 units were produced, fixed manufacturing costs amounted to $200,000 and the cost per unit manufactured totaled $5. On the basis of this information, how much cost would the firm anticipate at an activity level of 97,000 units?

A. $485,000.
B. $491,000.
C. $494,000.
D. $500,000.
E. Some other amount not listed above.

Answer 1

The anticipated cost at a production level of 97,000 units for Extron, Inc. would be $491,000, which includes the fixed cost of $200,000 and variable costs calculated at $3 per unit for a total of $291,000.

Step-by-step explanation:

The question pertains to the calculation of total costs at a different activity level for Extron, Inc. Given that the company has fixed and variable costs, we can deduce the variable cost per unit when 100,000 units are produced. At this level, the total cost is $500,000 (100,000 units x $5 per unit). Deducting the fixed cost of $200,000 from the total cost, we obtain a total variable cost of $300,000 for 100,000 units, or $3 per unit.

When the production level changes to 97,000 units, the fixed cost remains at $200,000, and the variable cost will be 97,000 units x $3 per unit = $291,000. Hence, the anticipated cost at the 97,000 units activity level would be the sum of the fixed and variable costs, which amounts to $491,000.

To illustrate the concept more clearly, consider a computer company that produces affordable, easy-to-use home computer systems with fixed costs of $250. The marginal cost varies per unit; however, the fixed cost does not change regardless of the number of units produced, similar to the fixed cost of $200,000 in Extron's case.