What would be the average fixed inspection cost per unit at an activity level of 6,800 machine-hours in a month?
The average fixed inspection cost per unit at an activity level of 6,800 machine-hours is $27.04. This is calculated by dividing the total fixed inspection cost of $183,872 by the number of units (machine-hours), which is 6,800.
Understanding Average Fixed Inspection Cost Calculation
Fixed Inspection Cost: In this scenario, Erkkila Incorporated reports that the total fixed inspection cost is $183,872 at an activity level of 6,500 machine-hours in a month. Fixed costs do not change with the level of activity and remain constant.
Calculation: To determine the average fixed inspection cost per unit at an activity level of 6,800 machine-hours, we divide the total fixed inspection cost by the number of units (machine-hours). Therefore, $183,872 divided by 6,800 equals $27.04 per unit.
Relevant Range: It is essential to note that this level of activity (6,800 machine-hours) falls within the relevant range, ensuring accuracy in cost estimation.
Conclusion: By calculating the average fixed inspection cost per unit at different activity levels, businesses can better understand cost implications and make informed decisions to optimize financial performance.