Question

X Company has the following data from 2016 and 2017:

	2016	2017
Total costs	$228,700	$364,170
Units produced	30,000	53,000

Expected production in 2018 is 43,400 units. Using the high-low method with the 2016 and 2017 data to determine the parameters of the cost function, what are estimated total costs in 2018?

Answer 1

	units	cost
high activity level [ 2017 ]	53,000	$364,170
less ;low activity level [ 2016 ]	(30,000)	($228,700)
difference	23,000	$135,470

Variable cost per unit = difference in cost / diiference in units = $135,470 / 23,000 = $5.89

Let us calculate fixed cost from the data of year 2016

Total cost = fixed cost + variable cost

$228,700 = fixed cost + ( variable cost per unit * units produced )

$228,700 = fixed cost + ( $5.89 * 30,000 )

$228,700 = fixed cost + $176,700

fixed cost = $228,700 - $176,700 = $52,000

Now let us calculate estimated total cost in 2018

	$
variable cost [ 43,400 units * $5.89 ]	$255,626
fixed cost	$52,000
Total cost	$307,626