Question 5: Cost structure estimation activity volume total costs in units month

Question

Question 5: Cost structure estimation activity volume total costs in units month Oct Nov Dec 85 75 105 $4,550 $4,750 $5,650 a) Which cost structure estimation method should we use? O account classification method O high-low method b) To identify the low and high points, we should look for O lowest/highest costs O lowest/highest activitb c) Estimate the cost structure parameters: total FC= unit VC Write down the total cost equation volume d) Predict the total costs of producing 100 units TC= e) Can we use the estimates from (c) to predict costs at volume of 5,000 units? O NO: 5,000 units is outside the relevant range (the normal range of activity is around 75-105 units). YES: Just plug in volume 5,000 in the total cost equation.

Explanation / Answer

a)
High Low Method

b)
Lowest/Highest Activity

Note - a) High Low method is used to split Variable cost and Fixed cost that are part of Mixed cost.
b) It uses High Activity cost and Low activity cost.

c)

High level Activity = 105 Cost = $5650
Low level Activity = 75 Cost = $4750

Variable Cost = (High level Activity Cost - Low Level Activity Cost) / (High level Activity - Low Level Activity)
= ($5650 - $4750) / (105 - 75)
= $900 / 30 = $30

Fixed Cost = Total Mixed Cost - Variable Cost x Units = 5650 - ($30 x 105) = $2500

Total Cost Equation
TC = FC + VC x Volume
TC = $2500 + $30 x Volume

d)
Total Cost of Producing 100 units =
$2500 + $30 x 100 = $5500

e)
No. 5000 units is outside the relavant range (the normal range of activity is around 75 - 105 units)

Note - With is 75 - 105 range, the Fixed cost remains same. At 5000 units, fixed will will be higher than current fixed cost.

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