In: Accounting
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.
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 |