Question

The manufacturing costs of Alex Industries for three months of the year are provided below.

	Total Costs		Production
January	$372,600		2,250	units
February	485,620		4,410
March	579,600		6,750

Using the high-low method, determine (a) the variable cost per unit and (b) the total fixed cost. Round all answers to the nearest whole dollar.

a. Variable cost per unit	$
b. Total fixed cost	$

Answer 1

Note :

• Highest level of activity : March = $579,600; 6,750 units
• Lowest level of activity :  January = $372,600 ; 2,250 units

Variable cost per unit under high low method

= (Total cost @ highest level - Total cost @ lowest level) / (units @ highest level - Units @ lowest level)

= ($579,600 - $372,600) / (6,750 units - 2,250 units) = $207,000 / 4,500 units = $46 per unit

Now, we know ,

Total cost = Fixed Cost + (Variable cost per unit * Units)

Subtituing the values at lowerst level of activity

$372,600 =   Total Fixed Cost + ($46 * 2,250 units)

or , Total Fixed Cost =  $372,600 - $103,500

Total Fixed Costs =  $269,100

Final Answer :

a. Variable cost per unit	$46
b. Total fixed cost	$269,100