Discovering Erkkila Inc. Inspection Cost
How can we calculate the average fixed inspection cost per activity unit at different activity levels for Erkkila Inc.?
Answer:
To calculate the average fixed inspection cost per activity unit at different activity levels for Erkkila Inc., we can use the total fixed inspection cost and the activity unit (machine-hours) for each level of activity...
Understanding Erkkila Inc.'s Inspection Cost Calculation
Erkkila Inc. reports its total variable inspection cost at $423,980 and total fixed inspection cost at $162,426 for an activity level of 6,600 machine-hours in a month. Now, let's calculate the average fixed inspection cost per activity unit at a different level of activity, specifically at 6,900 machine-hours...
Calculating the Average Fixed Inspection Cost
First, we need to determine the fixed inspection cost per unit of activity at the initial level of 6,600 machine-hours:
Fixed Inspection Cost at 6,600 machine-hours = $162,426
Activity Unit at 6,600 machine-hours = 6,600
Therefore, Average Fixed Inspection Cost Per Activity Unit at 6,600 machine-hours:
$162,426 / 6,600 = $24.64
Applying the Average Fixed Inspection Cost Calculation
Since Erkkila Inc.'s activity level of 6,900 machine-hours falls within the relevant range, the fixed inspection cost remains the same at $162,426. Hence, the average fixed inspection cost per activity unit at 6,900 machine-hours would also be:
$162,426 / 6,900 = $23.54
Conclusion
By applying the same fixed cost to different activity levels, we can calculate the average fixed inspection cost per activity unit for Erkkila Inc. at various machine-hour levels within the relevant range.