Question

Shatner Inc. has decided to use the high-low method to estimate the total cost and the fixed and variable cost components of the total cost. The data for various levels of production are as follows:

Units Produced			Total Costs
5,945			$436,240
3,820			415,670
1,845			280,440

a. Determine the variable cost per unit and the total fixed cost.

Variable cost: (Round to the nearest dollar.)	$ per unit
Total fixed cost:	$

b. Based on part (a), estimate the total cost for 2,800 units of production.

Total cost for 2,800 units:

$

Answer 1

Answer:- a)-High-Low Method:-

Variable Cost per Unit

Variable cost per unit (b) is calculated using the following formula:

Variable cost per unit=Y2-Y1/X2-X1

Where,
y2 is the total cost at highest level of activity;
y1 is the total cost at lowest level of activity;
x2 are the number of units/miles/ labor ,machine hours etc. at highest level of activity; and
x1 are the number of units/miles/ labor, machine hours etc. at lowest level of activity

The variable cost per unit is equal to the slope of the cost volume line (i.e. change in total cost ÷ change in number of machine hours).

Total Fixed Cost

Total fixed cost (a) is calculated by subtracting total variable cost from total cost, thus:

Total Fixed Cost = y2 – b*x2 = y1 – b*x1

We have,
at highest activity: x₂ = 5945 units; y₂ = $436240
at lowest activity: x₁ = 1845 units; y₁ = $280440

Variable Cost per unit = ($436240− $280440) ÷ (5945 −1845)  

= $155800/4100 units =$38 per unit

Total Fixed Cost = $436240 − ($38 × 5945) = $436240 – $225910 =$210330

b)-The estimated monthly overhead costs =

Variable costs+ Fixed costs

=(2800 units*$38 per unit)+$210330

=$106400+$210330 =$316730