Question

Handy Hiking produces backpacks. In 2018, 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.
Q. Using the high/low method, the average variable cost of producing a backpack was: a. $15.00 b. $31.25 c. $30.38 d. $0.067

Q. Using the high/low method, the total fixed cost of producing a backpack was: a. $50,000 b. $1,500 c. $22,500 d. $109,733

Answer 1

Answer:

1) a. $15

2) a. $50,000

Explanation:

July: n1 = 4,000; c1 =$110,000

January: n2 = 2,500; c1 =$87,500

1) Using the high/low method, the average variable cost is determine as the difference between the highest and lowest activity costs, divided by the difference between the highest and lowest output:

$VC = \frac{c_1-c_2}{n_1-n_2}=\frac{110,000-87,500}{4,000-2,500}\\ VC=\ 15$

The average variable cost is $15.

2) The total fixed cost is determined by the highest activity cost (c1), subtracted by the product of the highest output and the variable cost (n1 x VC):

$FC = c_1 -(n_1*VC)\\FC = 110,000 - (4,000*15)\\FC=\ 50,000$

Total fixed cost is $50,000.