Question

The manufacturing costs of Ackerman Industries for the first three months of the year follow:

Particulars	Total cost	Units produced
January	$1,900,000	20,000 units
February	2,250,000	27,000
March	2,400,000	30,000

Using the high low method,Determine (a) the variable cost per unit and (b) the total fixed cost

Answer 1

High low method : It is a method of evaluating variable and fixed costs per unit by utilising the greatest and lowest level of activities and their related expenses

(a) Calculation of variable cost per unit

Difference in total cost  = $500,000

Difference in units produced = 10,000 units

Variable cost per unit = Difference in total cost / Difference in units produced

=$500,000 / 10,000 units

=$50 per unit

Calculation of Difference in total cost and total units produced

Level of activity	Units produced	Total cost
Highest level (a)	30,000	2,400,000
lowest level (b)	20,000	1,900,000
Difference ( a- b)	10,000	5,00,000

(b) Calculation of total fixed cost

Highest level of activity for 30,000 units

Total fixed cost = Total cost -  (Variable cost per unit x units produced)

=$2,400,000 - ($50 per unit x 30,000 units)

=$2,400,000 - $1,500,000

=$900,000

Lowest level of activity for 20,000 units

Total fixed cost = Total cost -  (Variable cost per unit x units produced)

=$1,900,000 - ($50 per unit  x 20,000 units)

=$1,900,000 - $1,000,000

=$900,000

(a) Therefore, the variable cost per unit under high low method is $50 per unit

(b)Therefore, the total fixed cost in both alternatives under the high low method is $900,000