Question

Altawfik Corporation is estimating the cost function for total cost of production of product A using the two points method. The data collected for the past year is as following:

                                        Number of units        Total

                Quarter            produced                   Costs

                      1                     4,000                $   1,000

                      2                     5,400                     1,280

                      3                     7,000                     1,600

                      4                     9,000                     2,000

            Using the two points methods, choose two points with which you estimate the cost function.

Answer 1

Variable Cost = Differece in cost / Difference in Units Fixed cost = Cost-(hours *Variable Cost) Cost Equation = Fixed Cost +(Hours * Varaible cost Per Unit) High level of Activity low level of Activity Difference Estimate the costs with High-Low Method Units 9000 4000 5000 Total Cost 2000 1000 1000 Varaible cost Per unit (1000/5000) 0.20 Per unit Fixed Cost (2000-9000*0.20) 200 Per month Cost Funtion = Total Cost = $200+ $0.20* Units Prodcued