Chapter 23, Problem 1MCQ

To determine

Determine the amount of fixed costs and variable costs.

Explanation of Solution

Fixed Costs: Companies incur some costs that are not flexible according to the units produced. Those costs are called fixed costs. Fixed costs categorized into two types as direct fixed costs and indirect fixed costs.

Variable Cost: The cost which is not fixed is called as variable cost. This cost is directly proportional to the level of output produced, it increase with increase in output and vice versa

Calculate the amount of fixed costs and variable costs:

Fixed costs:

The fixed costs are budgeted an amount of $300,000. If any activity level declines in production, it will not affect the fixed cost. Hence, the amount of fixed cost is $300,000.

Variable costs:

$\begin{array}{c}\text{Variable cost =}\left[\begin{array}{l}\left(\frac{\text{Budgeted variable cost}}{\text{Sales unit}}\right)\\ \times \text{Number of units declines}\end{array}\right]\\ \text{=}\left[\left(\frac{\text{\$246,000}}{\text{24,000 units}}\right)\times \text{20,000 units}\right]\\ =\$10.25\times \times \text{20,000 units}\\ =\$205,000\end{array}$

The above computation is matching with the option c. Fixed, $300,000; variable, $205,000. Therefore, option (c) is the correct option. Options (a), (b), (d), and (e) are the incorrect options.

Conclusion

Hence, the correct answer is option c.