Question

Konza Company has collected the following cost and production data from their manufacturing operations over the past eight months.

Period	Units Produced	Total costs (Sh)
1	2,200	10,500
2	3,100	12,750
3	5,600	18,500
4	1,700	9,250
5	6,300	20,750
6	8,100	25,250
7	5,050	17,625
8	3,000	12,500

(a) Using the high-low method ;

i. Estimate the fixed production costs,

ii. Estimate the variable production cost per unit,

(b) Establish a cost estimating function for the total production costs.

(c) Estimate the total cost of production for a period when the units produced equal;

(i) 6,500 units,

(ii) 9,250 units

Answer 1

1. Calculate variable cost per unit using the identified high and low activity levels

Variable cost = (Total cost of high activity – Total cost of low activity) / (Highest activity unit – Lowest activity unit)

Variable cost = ($25,250 - $9,250) / (8100 – 1700)

Variable cost = $16,000/6400 = $2.5 per unit

2. Solve for fixed costs

To calculate the total fixed costs, plug either the high or low cost or the variable cost into the total cost formula.

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

$25,250 = ($2.5 x 8100) + Total fixed cost

$25,250 = $20,250 + Total fixed cost

Therefore, Total fixed cost = $25,250-$20,250 = $5,000

3. Construct total cost equation based on high-low calculations above

Using all of the information above, the total cost equation is Total cost = 2.5x + 5000, which can be used to calculate the total cost of various units

4. Estimate the total cost of production for a period when the units produced equal;

(i) 6,500 units,

Total cost = 2.5x + $5000

Total cost = $2.5($6500)+$5000

Total cost = $16250+$5000

Total cost =$ 21250

(ii) 9,250 units

Total cost = 2.5x + $5000

Total cost = $2.5($9250)+$5000

Total cost = $23125+$5000

Total cost =$ 28,125