Q 4 Abdulwahab Corporation is estimating the cost function for total cost of pro

Question

Q 4 Abdulwahab Corporation is estimating the cost function for total cost of production of product A using the high-low method. The data collected for the past year is as following Number of units Total Quare produced Costs 1 4,000 1,000 2 5,400 1,280 3 7,000 1,600 4 9,000 2,000 Calculate the following amounts: a. The variable cost per unit b. The fixed cost c. Explain the method used by the company to estimate the cost function. Suggest other methods than may be used to estimate cost function. (Week 3 chapter) Answer to Question 4

Explanation / Answer

*We can calculate fixed cost by the highest and lowest value just as: (fixed cost remains same)

Ans.a Variable cost per unit =   (highest cost - lowest cost) / (highest units produced - lowest units produced) (2000 - 1000) / (9000 - 4000) 1000 / 5000 $0.20 per unit Ans.b Fixed cost = Total cost - (variable cost per unit * unit produced)

*We can calculate fixed cost by the highest and lowest value just as: (fixed cost remains same)

Highest   : 2000 - (0.20 * 9000) 2000 - 1800 200 lowest   : 1000 - (0.20 * 4000) 1000 - 800 200 So the Fixed Cost is   $200 Ans.c High-low method :   This is a method that is used to separate the fixed and variable cost from the mixed cost. In this method the difference between highest and lowest cost is divided by the difference of highest and lowest units produced.It results the variable cost per unit. Then we can use this variable cost per unit to calculate total variable cost on each unit and fixed cost. There are total three methods that are used to estimate the cost functions: 1. Graphical method. 2. High-low method. 3. Regression analysis.

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