b) Then use the high-low method to estimate the fixed and variable components of
ID: 2483598 • Letter: B
Question
b) Then use the high-low method to estimate the fixed and variable components of the cost of sales.
1
Bell Bike Co. report the following information about its sales and cost of sales. a) Draw and estimated line of cost behavior using a scattered diagram and compute fixed costs per unit sold.b) Then use the high-low method to estimate the fixed and variable components of the cost of sales.
Period Units sold cost of sales1
- $2500 2 400 $3100 3 800 $3700 4 1200 $4300 5 1600 $4900 6 2000 $5500 7 2400 $6100 8 2800 $6700 9 3200 $7300 10 3600 $7900Explanation / Answer
(A)
Estimated line of cost behavior
- Since at 0 unit sold cost of sales is $2,500 therefore fixed cost is $2,500.
- Variable cost at 400 unit sold = Total cost of sales - Fixed cost
400 = 3,100 - 2500
= 600 / 400
= $1.5
(B) High low method
The high-low method uses the highest and lowest activity levels of a data set to estimate the portion of a mixed cost that is variable and the portion that is fixed.
Formula to calculate variable cost per unit sold =
Y2 - Y1 / X2 - X1
X2 is the high activity level
X1 is the low activity level
Y2 is the total cost at the high activity level
Y1 is the total cost at the low activity level
Variable cost per unit = $7,900 - $2500 / $3,600 - Nil
= $5,400 / $3,600
= $1.5
Calculation of fixed cost = Total cost of sale at 400 units - Variable cost at 400 unit sale
= 3,100 - (400*1.5)
= 3,100 - 600
= 2,500
Therefore variable cost per unit is $1.5 and fixed cost is $2,500.
Y2 - Y1 / X2 - X1
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