Question

High-Low Method Diamond Inc. has decided to use the high-low method to estimate the total cost and the fixed and variable cost components of the total cost. The data for various levels of production are as follows:
Units Produced Total Costs
12,000 $424,000
15,000 496,000
21,000 640,000
(a). Determine the variable cost per unit and the total fixed cost. Variable cost (Round to two decimal places.) $ per unit ____________
Total fixed cost $_____________
(b). Based on part (a), estimate the total cost for 17,000 units of production. Total cost for 17,000 units $__________

Answer 1

Answer:

(a) $24 per unit; $136,000

(b) $544,000

Explanation:

(a) Computation of variable cost per unit and the total fixed cost

Let Y1 = $424,000 and Y2 = $640,000,

X1 = 12,000 and X2 = 21,000

variable cost per unit (b) = (Y2 - Y1) ÷ (X2 - X1 )

                                          = ($640,000 - $424,000) ÷ (21,000 - 12,000)

                                          = $24  per unit

Total fixed cost:

                  Y2 - bX2 = Y1 - bX1

640000 - 24 × 21000 = 424000 - 24 × 12000

                  $136,000  = $136,000

(b) Computation of total cost for 17000 units of production

Total cost = [variable cost per unit × units produced ] + total fixed cost

                 = [24 × 17000] + 136000

                 = $544,000.