The following information was extracted from the accounting records of MIXED-UP (PTY) LTD, an entity engaged in the repair and servicing of heavy-duty machinery and equipment: Quarter 1 Quarter 2 Quarter 3 Output [units] 90,000 180,000 150,000 Production costs 670,000 940,000 850,000 The newly appointed cost accountant, Ms. Hagar-Abrams stated that the step costs comprise of both variable and fixed cost components. She further stated that it is important to separate the mixed costs between its different cost components in order to make effective operating decisions. You are required to: (a) Discuss whether the statement made by Ms. Hagar-Abrams about step costs comprising of both variable and fixed cost components are correct. (b) Classify the production costs based on its behaviour in relation to the level of output. Support your answer with calculations and reasons. (c) Calculate the variable and fixed overhead cost components for the production costs using the High-Low method.

(a) Ms. Hagar-Abrams is correct in her statement that step costs comprise of both variable and fixed cost components. Step costs are costs that remain constant for a certain range of output, but change when that output range is exceeded. This means they have characteristics of both fixed costs (which remain constant regardless of output) and variable costs (which change in direct proportion to output).

(b) To classify the production costs based on its behaviour in relation to the level of output, we need to look at how costs change as output changes.

In Quarter 1, the output is 90,000 units and the cost is $670,000. In Quarter 2, the output increases to 180,000 units and the cost increases to$940,000. In Quarter 3, the output decreases to 150,000 units and the cost decreases to $850,000.

This suggests that the production costs are variable, as they increase and decrease in line with output.

(c) To calculate the variable and fixed overhead cost components for the production costs using the High-Low method, we first identify the highest and lowest levels of activity.

The highest level of activity is in Quarter 2 (180,000 units) with a cost of $940,000. The lowest level of activity is in Quarter 1 (90,000 units) with a cost of$670,000.

The variable cost per unit is calculated as the change in cost divided by the change in activity.

So, the variable cost per unit = ($940,000 -$670,000) / (180,000 units - 90,000 units) = $3 per unit.

The fixed cost is then calculated by subtracting the total variable cost from the total cost at either the highest or lowest level of activity.

So, the fixed cost = $670,000 - ($3 per unit * 90,000 units) = $670,000 -$270,000 = $400,000.

Therefore, the variable cost component is $3 per unit and the fixed cost component is$400,000.