Question

# High-Low Method Liberty Inc. has decided to use the high-low method to estimate costs. The data...

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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