A company prepares a budget each month for manufacturing costs. Formulas have been
developed for all costs within a relevant range of 5,000 to 15,000 units per month. The
budget for electricity (a semi variable cost) is $19,800 at 9,000 units per month, and $21,000
at 10,000 units per month. How much should be budgeted for electricity for the coming
month if 12,000 units are to be produced?

Answer (C) is correct.
The company’s budget consists of a fixed cost component and a variable
cost component. The fixed cost component can be expected to remain
constant throughout the budget’s relevant range. The variable cost
component, however, will change at a constant rate within the budget’s
range. The increase in budgeted cost of $1,200 ($21,000 – $19,800) per
1,000 units of production can therefore be calculated as the variable cost
per unit of $1.20 [($21,000 – $19,800) ÷ 1,000] and the total fixed costs
of $9,000 [$21,000 – (10,000 × $1.20)]. These costs can then be used to
determine the total cost of using 12,000 units of electricity [(12,000 ×
$1.20) variable + $9,000 fixed].