Question

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 4,950 $425,040 1,650 273,240 3,230 321,210 a. Determine the variable cost per unit and the total fixed cost. Variable cost: (Round to the nearest dollar.) $ per unit Total fixed cost: $ b. Based on part (a), estimate the total cost for 2,380 units of production. Total cost for 2,380 units: $

Answer 1

Under the High low method of cost estimation, we use the highest level of activity and the lowest level of activity to compare the costs and find the variable cost per unit.

Requirement a:-

Variable Cost = (Highest Activity cost - Lowest activity cost)/(Highest Activity units - Lowest activity units)

Variable Cost = (425,040 - 273,240)/(4,950-1,650)

=151,800/3,300

Variable cost per unit = $46

Now substitute the Variable cost per unit to find fixed costs

Total costs to produce to 4,950 units = 425,040

Variable costs for 4,950 units * $46 per unit = $227,700

Fixed costs = 425,040 - 227,700 = 197,340

Fixed costs = $197,340

Variable Cost per unit = $46

Requirement b:-

Total cost for 2,380 units can be calculated as

Variable cost :- 2,380 units * $46 per unit = $109,480 - A

Fixed costs :- $197,340 - B

Total costs to produce 2,380 units = $306,820 (A+B)