Question

Winston uses the high-low method. It had an average cost per unit of $10 at its lowest level of activity when sales equaled 10,000 units and an average cost per unit of $6.50 at its highest level of activity when sales equaled 20,000 units. What would Winston estimate its total cost to be if sales equaled 8,000 units?

Answer 1

Answer: $94,000

Step-by-step explanation:

`Average\ cost = (Total\ cost)/(number\ of\ units)`

At 10,000 units;

total cost = $10,000 × 10

= $100,000

At 20,000 units,

Total cost = 20,000 × 6.5

= $130,000

Variable cost per unit using high low method:

`= (Total\ cost\ at\ 20,000\ units - Total\ cost\ at\ 10,000\ units)/(20,000-10,000)`

= $3 per unit

Hence,

Total fixed costs = Total cost at 20,000 units - (No. of units × Variable cost per unit)

= $130,000 - (20,000 × 3)

= $70,000

Hence total cost at 8000 units = (No. of units × Variable cost per unit) + Total fixed costs

= (8000 × 3) + 70,000

= $94,000