Question

Yang Manufacturing, which uses the high-low method, makes a product called Yin. The company incurs three different cost types (A, B, and C) and has a relevant range of operation between 2,500 units and10,000 units per month. Per-unit costs at two different activity levels for each cost type are presented below.

	Type A				Type B				Type C				Total
5000 units	$4				$9				$4						$17	$
7500 units	$4				$6				$3						$13

Yang produces 10,000 units, the total cost would be:

A.$90,000.

B.$100,000.

C. $110,000.

D.$125,000.

E.an amount other than those given above.

Answer 1

Solution:

Variable cost per unit of Type -B = (Cost at high level - Cost at low level) / (High level activity - Low level activity)/

= ($45,000 - $45,000) / (7500 - 5000) = 0

Fixed cost of Type B = $45,000

Variable cost per unit of Type -C = (Cost at high level - Cost at low level) / (High level activity - Low level activity)/

= (7500*$3 - 5000*$4) / (7500 - 5000) = $1 per unit

Fixed cost of Type C =7500*$3 - (7500*$1) = $15,000

Cost function = Fixed cost + Variable cost * Nos of units

= ($45,000 + $15,000) + ($4+$1) * Nos of units

= $60,000 + $5 X

Total cost at 10000 units = $60,000 + ($5*10000) = $110,000

Hence option c is correct,