A business has forecast its telephone expense for the year to be £1800. This consists of a fixed element for line rental which is 1/3 of the total cost; the remaining 2/3 are variable based on the telephone calls made. The business has been informed that the cost of the line rental will be reduced by 1⁄4. However, the cost of calls will increase by 20%.
How much will the revised forecast telephone expense be, assuming the number of calls does not change?
Select ONE answer:
- £1,845
- £1,890
- £1,917
- £2,040
- £2,097
Explain and justify your answer?
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This is multiple choice question is suitable for Accounting KS5 classes.
The answer is 2 – Fixed rental element is £1,800 / 3 = £600. A 25% reduction is a £150 saving. The cost of calls is therefore £1,200 which is they go up by 20% will be a £240 cost increase (£1,200 *1.2). The difference between the cost decrease in the fixed and cost increase in the call cost is -£150+£240 = £90 cost increase.
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