Question

Strait Co. manufactures office furniture. During the most productive month of the year, 3,700 desks were manufactured at a total cost of $82,400. In the month of lowest production the company made 1,200 desks at a cost of $65,000. Using the high-low method of cost estimation, total fixed costs are
a.$17,400
b.$65,000
c.$56,648
d.$82,400

Answer 1

Answer:

Option (c) is correct.

Explanation:

Given that,

Highest level of activity = 3,700

Total cost at highest level of activity = $82,400

Lowest level of activity = 1,200

Total cost at lowest level of activity = $65,000

Here, we are using high-low method of cost estimation,

Variable cost per unit:

= (Total cost at highest level of activity - Total cost at lowest level of activity) ÷ (Highest level of activity - Lowest level of activity)

= ($82,400 - $65,000) ÷ (3,700 - 1,200)

= $17,400 ÷ 2,500

= $6.96

Fixed Costs:

= Total cost at highest level of activity - (Variable cost per unit × Highest level of activity)

= $82,400 - ($6.96 × 3,700)

= $82,400 - $25,752

= $56,648