Question

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 2,240 $98,000 840 63,000 1,450 90,160 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 1,110 units of production. Total cost for 1,110 units: $

Answer 1

Under High – Low method, Variable cost per unit

= ( Highest Cost – Lowest Cost ) / ( Highest Quantity – Lowest Quantity )

So, as we can find, Highest cost is $98,000 at 2,240 production level and Lowest cost is $63,000 at 840 production level

So, Variable cost per unit as per High – Low method

= ($98,000 - $63,000 ) / ( 2,240 – 840 )

= $35,000 / 1,400

= $25 per unit

So, Variable cost per unit is $25

Putting the value of variable cost per unit in highest quantity or lowest quantity we get,

Total Cost = Variable cost per unit x Number of units + Fixed cost

So, $98,000 = $25 x 2,240 + Fixed Cost

So, Fixed Cost = $98,000 - $56,000

= $42,000

So, total cost for 1,110 production level as per total cost equation

= $25 x 1,110 + $42,000

= $27,750 + $42,000

= $69,750