Question

Below is a listing of inspection costs at one of Lockheed Martin's production facilities:

	Units Produced			Inspection Costs
April		922		$	17,912
May		983		$	18,300
June		928		$	17,965
July		912		$	17,810
August		934		$	17,994
September		919		$	17,880
October		936		$	18,032
November		876		$	17,290
December		915		$	17,838

The controller of Lockheed Martin has determined that inspection costs are a mixed cost that depend on units of production.

Estimate the fixed cost per month of inspection using the high-low method. Your answer is closest to:

Answer 1

Calculation of Fixed cost is as follows:

Total cost = Variable cost + Fixed cost

Thus, Fixed cost = Total cost - Variable cost

High Level activity: 983 units

Fixed cost = Total cost - Variable cost

= $ 18,300 - $ 9278.78275

= $ 9021.21725

Total Variable cost = activity level * Variable cost per unit

= 983 * $ 9.43925

= $ 9278.78275

Thereofre Fixed cost is $ 9021.21725

or

Low Level activity: 876 units

Fixed cost = Total cost - Variable cost

= $ 17,290 - $ 8268.783

= $ 9021.217

Total Variable cost = activity level * Variable cost per customer

= 876 * $ 9.43925

= $ 8268.783

Thereofre Fixed cost is $ 9021.21725

Working note:

Calculation of Variable cost per unit is as follows:

Variable cost per unit = ( Total cost at high activity level - Total cost at low activity level ) / ( High activity level - low activity level )

In this case high activity level at May 983 units

In this case low activity level at November 876 units

Variable cost per unit = ( Total cost at high activity level - Total cost at low activity level ) / ( High activity level - low activity level )

= ( $ 18,300 - $ 17,290 ) / ( 983 - 876 )

= $ 1,010 / 107

= $ 9.43925 per unit

Thus, Variable cost is $ 9.43925 per unit