Final answer:
The fixed element of energy cost for Hay Ltd is calculated by finding the variable cost per unit and subtracting the total variable cost at the lowest volume of activity from the total energy cost, resulting in £10,000.
Step-by-step explanation:
Calculating the Fixed Element of Energy Cost
To identify the fixed element of energy cost for Hay Ltd, we need to use the given data regarding their energy expenses at different levels of production. We can start by calculating the variable cost per unit by finding the difference in total costs and dividing by the difference in units produced between the highest and lowest volumes of activity.
Using the formula Variable Cost per Unit = (Total Cost at High Activity - Total Cost at Low Activity) / (High Activity Units - Low Activity Units), we get:
Variable Cost per Unit = (£25,000 - £22,000) / (50,000 units - 40,000 units) = £3,000 / 10,000 units = £0.30 per unit.
Now that we have the variable cost per unit, we can calculate the total variable cost at the lowest volume of activity and subtract it from the total energy cost to get the fixed cost. For 40,000 units, the total variable cost will be 40,000 units * £0.30/unit = £12,000. Therefore, the fixed element of the energy cost is £22,000 - £12,000 = £10,000.
The correct answer is D. £10,000.