Using the high-low technique, it was determined that the projected cost of supplies for producing 1,000 units would be $4,400. the correct answer is Option A.
The high-low method estimates the fixed and variable cost components of a mixed cost using cost data from a period of time. To determine the variable cost rate per unit of activity, the high-low technique analyses cost data from the highest and lowest activity levels. The high-low formula estimates the variable cost rate:
Variable cost rate = (High cost – Low cost) / (High activity level – Low activity level)
We are given the following information: Month Production volume Supplies cost July 700 $3,185
August 1,600 $7,100September 600 $2,700
The high activity level is in August with 1,600 units produced. The low activity level is September with 600 units produced. The high cost is $7,100 in August, and the low cost is $2,700 in September.
Variable cost rate = (High cost – Low cost) / (High activity level – Low activity level)
Variable cost rate = ($7,100 – $2,700) / (1,600 – 600)
Variable cost rate = $4,400 / 1,000
Variable cost rate = $4.40 per unit using the variable cost rate per unit calculated above, we can estimate the supplies cost at 1,000 units of production.
Supplies cost = Variable cost rate per unit × Units of production
supplies cost = $4.40 × 1,000
Supplies cost = $4,400
Therefore, the estimate of supplies cost at 1,000 units of production using the high-low method is $4,400.Option A is the correct answer.