Question

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.

$___________

Answer #1

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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