Fixed costs increase by $10,000 when activity goes above 6,000 units. Total costs were $38,000 at 3,000 units and $90,000 at 9,000 units. The variable cost per unit is constant. What is the expected total cost at 7,500 units?

Correct answer: B) $79,500

Explanation

First remove the step from the higher cost: 90,000 - 10,000 = $80,000. Variable cost per unit = (80,000 - 38,000) / (9,000 - 3,000) = 42,000 / 6,000 = $7. Fixed cost below 6,000 units = 38,000 - (3,000 x 7) = $17,000. At 7,500 units (above the step): 17,000 + 10,000 + (7,500 x 7) = $79,500. Ignoring the step gives a variable cost of $8.67 and a total of $77,000.