Question

Inspection costs at one of Iuliano Corporation's factories are listed below:

Units produced Inspection cost
February 925 $ 18,212
March 989 $ 18,600
April 931 $ 18,265
May 915 $ 18,110
June 937 $ 18,294
July 922 $ 18,180
August 939 $ 18,332
September 879 $ 17,560
October 918 $ 18,138

Management believes that inspection cost is a mixed cost that depends on units produced.

Using the high-low method, the estimate of the fixed component of inspection cost per unit produced is closest to: (Round the intermediate calculations to two decimal places.)

1) $18,120.00
2) $17,561.00
3) $18,111.00
4) $9,253.95

Answer 1

4) $9,253.95. Using the high-low method, we calculate a fixed component of inspection costs of approximately $9,248.45 by comparing the highest and lowest points of activity. The closest answer provided is $9,253.95, taking into account minor rounding differences.

Step-by-step explanation:

To determine the fixed component of inspection cost per unit produced using the high-low method, we first identify the high and low points of activity based on the number of units produced and the total inspection costs. The highest activity level in the data provided is in March with 989 units at a cost of $18,600, and the lowest activity level is in September with 879 units at a cost of $17,560.

We calculate the variable cost per unit (VCU) by taking the difference in costs divided by the difference in units at the high and low activity levels:

VCU = ($18,600 - $17,560) / (989 units - 879 units) = $1,040 / 110 units = $9.45/unit

Next, we find the total fixed costs (TFC) by subtracting the total variable costs at either the high or low point from the total cost at that point:

TFC at high point = Total cost - (VCU × Units at high point) = $18,600 - ($9.45 × 989 units)

TFC at high point = $18,600 - $9,351.55 = $9,248.45

Since fixed costs remain constant regardless of the activity level, this is the fixed component we were looking for. None of the choices given precisely match this calculation, but the closest answer is option 4) $9,253.95, if we consider a minor rounding difference.