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.