Question

#5

High-Low Method

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
975			$121,500
1,550			149,040
2,475			189,000

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 1,240 units of production.

Total cost for 1,240 units:

$

Answer 1

Answer of Part a:

Variable cost per unit = Difference in total costs / Difference in Production
Variable cost per unit = ($189,000 - $121,500) / (2,475 / 975)
Variable cost per unit = 67,500 / 1,500
Variable cost per unit = $45

At Highest Level:

Total Cost = Variable cost + Fixed Cost
$189,000 = ($45 * 2,475) + Fixed Cost
$189,000 = $111,375 + Fixed Cost
Fixed Costs = $77,625

At lowest Level:

Total Cost = Variable cost + Fixed Cost
$121,500 = ($45 * 975) + Fixed Cost
$121,500 = $43,875 + Fixed cost
Fixed Cost = $121,500 - $43,875
Fixed Cost = $77,625

Answer of Part b:

Variable cost = No. of units * Variable cost per unit
Variable cost = 1,240 * $45
Variable Cost = $55,800

Fixed costs = $77,625

Total Cost = Variable Cost + Fixed Cost
Total Cost = $55,800 + $77,625
Total Cost = $133,425