Question

A department of Alpha Co. incurred the following costs for the month of September. Variable costs, and the variable portion of mixed costs, are a function of the number of units of activity:

Activity level in units		5,500
Variable costs	$	11,000
Fixed costs		29,000
Mixed costs		24,100
Total costs	$	64,100

During October the activity level was 7,000 units, and the total costs incurred were $68,500.

Required:

a. Calculate the variable costs, fixed costs, and mixed costs incurred during October.

b. Use the high–low method to calculate the cost formula for mixed cost. (Do not round intermediate calculations and round your answers to 2 decimal places.)

Answer 1

a)

Variable cost per unit

= Total variable costs / Number of units

= $11,000 / 5,500

= $2 per unit

So, Variable cost at 7,000 units

= Number of units x Cost per unit

= 7,000 x $2

= $14,000

Fixed cost = $29,000

So, Mixed cost

= Total cost – Variable costs – Fixed costs

= $68,500 - $14,000 - $29,000

= $25,500

b)

As per high-low method, variable cost per unit

= (Highest cost – Lowest cost) / (Highest quantity – Lowest quantity)

= (25,500 - $24,100) / (7,000 – 5,500)

= $0.93 per unit

So, Fixed cost

= Total cost – Variable cost per unit x Number of units

= $25,500 - $0.93 x 7,000

= $25,500 - $6,510

= $18,990