Question

High-Low Method The manufacturing costs of Ackerman Industries for the first three months of the year follow Units Produced Total Costs $227,700 January 2,300 units February 1,400 198,000 March 308,000 3,400 Using the high-low method, determine (a) the variable cost per unit and (b) the total fixed cost. Round all answers to the nearest whole dollar. a. Variable cost per unit $ b. Total fixed cost

Answer 1

Solution:

The formula for calculating the variable cost per unit as per the high low method

= ( Cost at Highest level of activity - Cost at Lowest level of activity ) / ( Units at Highest level of activity - Units at Lowest level of activity )

As per the information given in the question we have

Highest Level of activity = 3,400 units produced in month of March at a cost of $ 308,000

Lowest Level of activity = 1,400 units produced in month of February at a cost of $ 198,000

Thus we have

Cost at Highest level of activity = $ 308,000   ; Cost at Lowest level of activity = $ 198,000

Units at Highest level of activity = 3,400 ;   Units at Lowest level of activity = 1,400

Applying the above information in the formula for variable cost per unit we have

= ( $ 308,000 - $ 198,000 ) / ( 3,400 – 1,400 )

= $ 110,000 / $ 2,000

= $ 55

Thus the variable cost per unit as per the high low method = $ 55

The formula for calculating the Fixed cost as per the high low method is

= Cost at Highest level of activity – [ Variable cost per unit * Units at Highest level of activity ]

Applying the information available we have

Fixed costs = $ 308,000 – [ $ 55 * 3,400 ]

= $ 308,000 - $ 187,000

= $ 121,00

Thus the fixed cost as per the high low method = $ 121,000

The solution is

a. Variable cost per unit = $ 55

b. Total Fixed Cost = $ 121,000