Question

Winston uses the high-low method. It had an average cost per unit of $10 at its lowest level of activity when sales equaled 10,000 units and an average cost per unit of $6.50 at its highest level of activity when sales equaled 20,000 units. What would Winston estimate its total cost to be if sales equaled 8,000 units?

Answer 1

Answer:  $94,000

Explanation:

$Average\ cost = \frac{Total\ cost}{number\ of\ units}$

At 10,000 units;

total cost = $10,000 × 10  

               = $100,000

At 20,000 units,

Total cost = 20,000 × 6.5

               = $130,000

Variable cost per unit using high low method:

$= \frac{Total\ cost\ at\ 20,000\ units - Total\ cost\ at\ 10,000\ units}{20,000-10,000}$

     = $3 per unit

Hence,

Total fixed costs = Total cost at 20,000 units - (No. of units ×  Variable cost per unit)

= $130,000 - (20,000 × 3)

= $70,000

Hence total cost at 8000 units = (No. of units ×  Variable cost per unit) + Total fixed costs

= (8000 × 3) + 70,000

= $94,000