Question

Shum Manufacturing, which uses the high-low method, makes a product called Kwan. The company incurs three different cost types (A, B, and C) and has a relevant range of operation between 2,500 units and 7,000 units per month. Per-unit costs at two different activity levels for each cost type are presented below.

				Type A				Type B				Type C				Total
	5,000	units		$	23			$	66			$	23			$	112
	7,500	units			23				44				22				89

If Shum produces 7,000 units, the total cost would be:

Please show you calculated answer

Answer 1

Based on the information available in the question, we can answer as follows:-

Step 1:- Calculate Variable & Fixed cost using given information

Particulars	Part A	Part B	Part C	Total
Lowest activity cost (5,000 units)	115,000	330,000	115,000	560,000
Highest activity cost (7,500 units)	172,500	330,000	165,000	667,500
Variable cost per unit	23	0	20
Fixed cost = Highest activity cost - Total variable cost at Highest activity	0	330,000	15,000

Step 2:- Calculate the cost for 7,000 units

Statement showing cost for 7,000 units
Particulars	Part A	Part B	Part C	Total
Variable cost	161,000	0	140,000	301,000
Fixed Costs	0	330,000	15,000	345,000
Total	161,000	330,000	155,000	646,000

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