High-Low Method
Liberty Inc. has decided to use the high-low method to estimate costs. The data for various levels of production are as follows:
Units Produced | Total Costs | ||
100,000 | $1,800,000 | ||
180,000 | 2,800,000 | ||
300,000 | 4,300,000 |
a. Determine the variable cost per unit and the fixed cost. Round variable cost per unit to the nearest cent.
Variable cost per unit | $__________ |
Fixed cost | $__________ |
b. Based on part (a), estimate the total cost for 260,000 units of production.
$___________
a.
Variable cost per unit under the High-Low method = (Total costs at highest activity level - Total costs at lowest activity level) / (Highest activity level - Lowest activity level)
= ($4,300,000 - $1,800,000) / (300,000 - 100,000)
= $2,500,000 / 200,000
= $12.5
Fixed cost = Total cost - Variable cost
= $4,300,000 - (300,000 * $12.5)
= $550,000
Variable cost per unit | $12.5 |
Fixed cost | $550,000 |
b.
Total cost = Variable cost + Fixed cost
= (260,000*$12.5) + $550,000
= $3,800,000
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