Total Costs Question Need Help

Question

Salem Inc. produces and sells a single product. The company has provided the following information for the month of March.

 

Price : $40.00

Units Sold : 5,700

Variable Cost Per Unit : $17.00

Operating Leverage : 4.00

 

If the company sells 5,900 units its total costs should be closest to

A) 98,325 B) 195,225 C) 198,625 D) 234,025 E) None

Answer was C) but I need help with steps as to how and why.

Answer 1

the definition of operating leverage is L = (sale price/unit - variable cost/unit) x number of units

                                                             [(sale price/unit - variable cost/unit) x unit sales] - fixed costs

 

1. using this formula, we can determine the fixed costs

    4 = (sale price/unit - variable cost/unit) x number of units =   (40 - 17) x 5700       

          (sale price/unit - variable cost/unit) - fixed costs             [(40 - 17) x 5700] - FC

2. 4 x (131100 - FC) = 131,100; $524,000 - 4FC = $131,100; $524,000 - 131,100 = 4FC

3. solving for FC, we get FC = $98,325

4. we then look at the second part of the problem

    if we sell 5,900 units, the variable cost will be 5,900 x $17 = $100,300

5. we then add the fixed costs of $98,325 to give a total cost of $198,625

6. so the answer is option C