Question

#6 Please Show step by step, so I can solve similar problems, thanks!

Give your answer as a whole number but do not round your calculations until you get to the final answer.

Jole uses the high-low method of estimating costs. Jole had total costs of $12,373 at its lowest level of activity, when 2,597 units were sold. When, at its highest level of activity, sales equaled 6,091 units, total costs were $28,081. Jole would estimate fixed costs as: _______

Answer 1

Highest activity level = 6,091 units.

Cost at highest activity level = $ 28,081

Lowest activity level = 2,597 units.

Cost at lowest level = $ 12,373

At first, need to compute the variable cost per unit.

Variable cost per unit = ( Cost at highest level - cost at lowest level) /(units at highest level - units at lowest level)

Variable cost per unit = (28,081 - 12,373) /(6,091-2,597)

Variable cost per unit = 15,708/3,494

Variable cost per unit = $ 4.4957067 per unit.

Inorder to find out fixed cost, it is required to apply variable cost per unit in either highest activity level or lowest activity level.

Total cost = total fixed cost + total variable cost.

At highest activity level,

Total cost = $ 28,081

Total variable cost = 6,091 units x $ 4.4957067per unit.

Total variable cost = $ 27,383.34

28,081 = Fixed cost + 27,383.34

Fixed cost 28,081 - 27,383.34

Fixed cost = $ 697.66

Fixed cost = $ 698.

Hence, $ 698 is the correct answer.

SUMMARY:

Here variable cost per unit is not rounded because when it is rounded it is not possible to get accurate figure of fixed cost. Here, variable cost is applies at highest level. Let us apply it is in lowest level and check whether same figure is getting or not.

At lowest level,

Total cost = total fixed cost + total variable cost.

Total cost = $ 12,373

Total variable cost = 2,597 units x $ 4.4957067

Total variable cost = $ 11,675.35

12,373 = Fixed cost + 11,675.35

Fixed cost = 12,373 - 11,675.35

Fixed cost = $ 697.65

Fixed cost = $ 698.

First of all, need to compute variable cost per unit by applying values in formula and then apply the resulting per unit value at either on highest or lowest activity level.

Hence, $ 698 is the correct answer.