Iguchi Company sells a single product. Iguchi estimates demand and costs at vari
ID: 2436097 • Letter: I
Question
Iguchi Company sells a single product. Iguchi estimates demand and costs at various activity levels as follows:Units Sold Price Total Variable costs Fixed Costs
120,000 $48 $3,000,000 $1,000,000
140,000 $45 $3,500,000 $1,000,000
160,000 $40 $4,000,000 $1,000,000
180,000 $35 $4,500,000 $1,000,000
200,000 $30 $5,000,000 $1,000,000
Reference: Ref 8-1
How would you best describe Iguchi's variable cost per unit over the range shown?
Answer
It is constant
It is increasing as volume increases
It is decreasing as volume increases
It is first increasing as volume increases, then decreasing.
Explanation / Answer
Variable cost per unit is calculated as Variable cost per unit = Total variable cost / Number of units 1) Variable cost per unit is calculated for first alternative: VC/ Unit = $3,000,000 / 120,000 = $25 2) Variable cost per unit is calculated for second alternative: VC/ unit = $3,500,000 / 140,000 = $25 3) Variable cost per unit is calculated for third alternative: VC / unit = $4,000,000 / 160,000 = $25 4) Variable cost per unit is calculated for fourth alternative: VC / Unit = $4,500,000 / 180,000 = $25 5) Variable cost per unit is calculated for fifth alternative: VC / unit = $5,000,000 / 200,000 = $25 Therefore, the correct option is it remained constant. As the total variable cost is being increased with the number of units, it remained constant.