Question

Island Enterprises has presented the following information for the past eight months operations:

Month	Units	Total Cost
April	4,700	$	18,400
May	3,900	$	16,300
June	2,100	$	12,500
July	3,500	$	14,600
August	4,200	$	17,400
September	4,900	$	20,760
October	4,600	$	17,900
November	4,100	$	17,100

a. Using the high-low method, calculate the fixed cost per month and variable cost per unit. (Round variable cost to 2 decimal places.)

Fixed Cost _______ Per Month

Variable Cost _______ Per Unit

b. What would total costs be for a month with 3,700 units produced? (Do not round your intermediate calculations.)

Answer 1

High-Low Method

a) Variable Cost per unit :

= (Highest Activity Cost - Lowest Activity Cost) / (Highest Activity Units - Lowest Activity Units)

= (September Cost - June Cost) / (September Units - June Units)

= (20,760 - 12,500) / (4,900 - 2,100)

= 8,260 / 2,800

= $2.95 per unit

Fixed Cost = Highest Activity Cost - (Variable Cost * Highest Activity Units)

= $20,760 - ($2.95 * 4,900)

= $20,760 - $14,455

= $6,305 per month

[NOTE: We choose the highest activity units first and then the respective cost under those units and fixed cost can aslo be calculated by the formula = Lowest Activity Cost - (Variable cost * Lowest activity units) ]

b) Total Cost for 3,700 units :

Cost Model = Fixed Cost + (Variable Cost * Unit Activity)

= $6,305 + ($2.95 * 3,700)

= $6,305 + $10,915

= $17,220

Total Cost = $17,220