Question

Question 5: Cost structure estimation activity volume month Oct Nov Dec in units 80 75 100 total costs $4,085 $4,250 $5,000 a) Which cost structure estimation method should we use? O account classification method O high-low method b) To identify the low and high points, we should look for O lowest/highest costs O lowest/highest activity c) Estimate the cost structure parameters: total FC unit VC Write down the total cost equation TC = * volume d) Predict the total costs of producing 80 units: TC = e) Can we use the estimates from (c) to predict costs at volume of 5,000 units? YES: Just plug in volume=5,000 in the total cost equation. O NO: 5,000 units is outside the relevant range (the normal range of activity is around 75-100 units)

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Answer 1

A) high low method

Because High Low method is used to split Variable cost and Fixed cost that are part of Mixed cost

B) lowest/highest activity

As It uses High Activity cost and Low activity cost.

C) total fixed cost = $2000

Total variable cost = $30

Total cost equation = TC = FC + VC x Volume

TC = $2000 + $30 × volume

Explanation:

High level activity = 100 , cost = $5000

Low level activity = 75, cost = $4250

Variable Cost = (High level Activity Cost - Low Level Activity Cost) / (High level Activity - Low Level Activity)

= ($5000-$4250)/(100-75)

= $30

Fixed Cost = Total Mixed Cost - Variable Cost x Units

= $5000 - ($30 × 100)

= $2000

D)

Total cost of producing 80 units = $4400

TC = $2000 + $30 × 80

TC = $4400

E)

No. 5000 units is outside the relevant range (the normal range of activity is around 75 - 100units)

Note - With is 75 - 100 range, the Fixed cost remains same. At 5000 units, fixed will will be higher than current fixed cost.

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