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:

Multiple Choice

• $552,500.

• $645,000.

• $646,000.

• $860,000.

• None of the answers is correct.

Answer 1

Type A is a variable cost as per unit cost remain constant
Type-B is a fixed cost as the total fixed cost is $ 330,000 at both the level
Type-C is mixed cost to be apportioned as per High low method:
			Units	Cost
High -7500 units		7500	165000
Low-5000 units		5000	115000
Change			2500	50000
Variable cost of Type -C per unit = Change in cost / Change in unit
			50000 /2500 = 20 per unit
Fixed cost of Type-C:
Total cost at high activity	165000
Less: variable cost (7500*20)	150000
Fixed cost of Type-C:		15000
Total cost at 7000 units:
Type-A (7000*23)		161000
Type-B			330000
Type-C variable		140000
Type-C Fixed		15000
Total cost at 7000 units:	646000
Answer is $ 646,000