Question

Handy hiking produces backpacks. In 2007, its highest and lowest production levels occurred in july and january, respectively. In july, it produced 4,000 backpacks at a total cost of $110,000. In january, it produced 2,500 backpacks at a total cost of $87,500. Using the high/low method, the average variable cost of producing a backpack was:

Answer 1

Answer: The average variable cost of producing a backpack is $15.

The formula for calculating the variable cost per unit using the high/low method is:

$Average Variable Cost = \frac{y_{2} - y_{1}}{x_{2} - x_{1}}$

where

y₂  : cost at highest level of activity

y₁  : cost at lowest level of activity

x₂  : number of units produced at highest level of activity

x₁  : number of units produced at lowest level of activity

Substituting the values from the question in the formula we get,

$Average Variable Cost = \frac{110000 - 87500}{4000 - 2500}$

$Average Variable Cost = \frac{22500}{1500}$

$Average Variable Cost = 15$