Question

Using the high-low method, find the variable cost per unit and total fixed costs. How do you find the variable cost and total fixed costs?

Answer 1

To find the variable cost per unit and total fixed costs using the high-low method, identify two data points with their respective total costs, calculate the variable cost per unit by subtracting the fixed cost component from the total cost at the high activity level, and then divide the result by the difference in activity units between the high and low levels. Calculate the total fixed costs by subtracting the variable cost component from the total cost at either the high or low activity level.

Step-by-step explanation:

To find the variable cost per unit and total fixed costs using the high-low method, follow these steps:

1. Identify two data points: a high activity level and a low activity level, along with their respective total costs.
2. Calculate the variable cost per unit by subtracting the fixed cost component from the total cost at the high activity level, and then dividing the result by the difference in activity units between the high and low levels.
3. Calculate the total fixed costs by subtracting the variable cost component from the total cost at either the high or low activity level.

For example, if at a high activity level of 50 units, the total cost is $1,200, and at a low activity level of 20 units, the total cost is $600, the variable cost per unit would be calculated as follows: (($1,200 - Total Fixed Costs) - ($600 - Total Fixed Costs)) / (50 - 20). The total fixed costs can then be determined by subtracting the variable cost per unit from either the high or low total cost.

Answer 2

See explanation below

Step-by-step explanation:

Using the high-low method, we can find the variable cost per unit and total fixed costs.

The formula to find the variable cost per unit =
`(Highest cost - Lowest cost)/(highest number of units - lowest number of units)`

For example,

500 units = $4,000

600 units = $4,500

The variable cost per unit =
`(4,500 - 4,000)/(600 - 500)`

The variable cost per unit = $5

To determine the total fixed cost, we need to use the basic formula of total cost.

Total cost = fixed cost + variable cost

Total cost = fixed cost + variable cost per unit x quantity

In the above example,

we can choose either highest unit activity or least unit activity.

So, using least unit activity,

$4,000 = fixed cost + $5 x 500 units

or, $4,000 = fixed cost + $2,500

or, fixed cost = $1,500