Question

The following information is available for a company's cost of sales over the last five months Units sold Month Cost of sales January 570 $28,200 February 730 $33,500 March $45,500 1,250 2,570 April $57,500 Using the high-low method, the estimated total fixed cost is Multiple Choice $19,850 $29,300 $25,172 $79,400 $39,700

Answer 1

Answer- Using the high-low method, the estimated total fixed cost is = $19850.

Explanation:-

High-Low Method:-

Variable Cost per Unit

Variable cost per unit (b) is calculated using the following formula:

Variable cost per unit = (Y2-Y1)/(X2-X1)

Where,
y2 is the total cost at highest level of activity;
y1 is the total cost at lowest level of activity;
x2 are the number of units/miles/ labor ,machine hours etc. at highest level of activity; and
x1 are the number of units/miles/ labor, machine hours etc. at lowest level of activity

The variable cost per unit is equal to the slope of the cost volume line (i.e. change in total cost ÷ change in number of machine hours).

Total Fixed Cost

Total fixed cost (a) is calculated by subtracting total variable cost from total cost, thus:

Total Fixed Cost = (y2 – b)*x2 = (y1 – b*x1)

We have,
at highest activity: x₂ = 2570 units; y₂ = $57500
at lowest activity: x₁ = 570 units;   y₁ = $28200

Variable Cost per per unit = ($57500− $28200) /(2570 units −570 units)  

= $29300/2000 units = $14.65 per unit
Total Fixed Cost = $57500 − ($14.65 per unit*2570 units)

= $57500 – $37650

=$19850