Shatner Inc. has decided to use the high-low method to estimate the total cost a
ID: 2418045 • Letter: S
Question
Shatner 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:
a. Determine the variable cost per unit and the total fixed cost.
b. Based on part (a), estimate the total cost for 1,920 units of production.
Shatner 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 2,870 $368,630 1,260 272,160 4,060 423,360a. 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 1,920 units of production.
Total cost for 1,920 units: $Explanation / Answer
Variable cost=423360-272160/4060-1260=54
Fixed cost=423360-54*4060=204120
b.=1920*54+204120=307800
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High-Low Method
High-Low method is one of the several techniques used to split a mixed cost into its fixed and variable components (see cost classifications). Although easy to understand, high low method is relatively unreliable. This is because it only takes two extreme activity levels (i.e. labor hours, machine hours, etc.) from a set of actual data of various activity levels and their corresponding total cost figures. These figures are then used to calculate the approximate variable cost per unit (b) and total fixed cost (a) to obtain acost volume formula:
High-Low Method Formulas
Variable Cost per Unit
Variable cost per unit (b) is calculated using the following formula:
Where,
y2 is the total cost at highest level of activity;
y1 is the total cost at lowest level of activity;
x2 are the number of units/labor hours etc. at highest level of activity; and
x1 are the number of units/labor hours etc. at lowest level of activity
The variable cost per unit is equal to the slope of the cost volume line (i.e. change in total cost ÷ change in number of units produced).
Total Fixed Cost
Total fixed cost (a) is calculated by subtracting total variable cost from total cost, thus:
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