Question

HhMethod Ziegler Inc. has decided to use the high-low method to estimate the total cost and the fixed and variable cost components of the total cost. The data for various levels of production are as follows: Units Produced Total Costs 2.400 51.34.400 300 1,500 92,740 a. Determine the variable cost per unit and the total fixed cost Variable cost: (Round to the nearest dollar) b. Based on part (a), estimate the total cost for 1,150 units of production Total cost for 1,150 units

Answer 1

Answer- a)-Variable cost per unit =$30 per unit.

Total Fixed cost= $62400

b)- Total cost for 1150 units = $96900.

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 = 2400 units produced; y₂ = $134400
at lowest activity: x₁ =     800 units produced; y₁ = $86400

Variable Cost per unit produced = ($134400-$86400) /(2400 units-800 units)  

= $48000/1600 units produced

= $30 per unit produced
Total Fixed Cost = $86400 − ($30 per unit produced*800 units produced)

= $86400 – $24000

= $62400

Total expected costs = ($160 per video produced*64 videos)+$6900

= $10240+$6900

= $17140

Total costs for 1150 units = (1150 units*$30 per unit)+$62400

= $34500+$62400

= $96900