Using the high-low method, the variable cost per unit is $20 per unit and the total fixed cost is $100,000
The high-low method is a cost estimation technique used to determine the variable and fixed components of a cost by comparing the highest and lowest levels of activity and the corresponding costs.
It helps identify cost patterns and calculate the variable cost per unit and the fixed cost component within a given range of activity.
Using the method, the variable cost per unit is:
= (900,000 - 350,000) / (40,000 units - 12,500 units)
= $550,000 / 27,500 unit
= $20 per unit
Using the method, the total fixed costis:
= 900,000 - (20 x 40,000)
= 900,000 -800,000
= $100,000.
The full question is:
The manufacturing costs of Lightfoot Industries for three months of the year follow:
Total Costs Units Produced
January $640,000 30,000 units
February 900,000 40,000
March 350,000 12,500
Using the high-low method, determine (a) the variable cost per unit and (b) the total fixed cost.