Accounting ? Smith Inc has decided to use the high-low method to estimate the co

Question

Accounting ?

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

Units Produced

Total Costs

6000

525000

8500

625000

10000

750000

(a) Determine the variable cost per unit and fixed cost

(b) Determine the equation for production based upon your findings.

(C) Based on part (a) estimate the cost for 12000 units

Units Produced

Total Costs

6000

525000

8500

625000

10000

750000

(a) Determine the variable cost per unit and fixed cost

(b) Determine the equation for production based upon your findings.

(C) Based on part (a) estimate the cost for 12000 units

Explanation / Answer

A) Variable cost per unit = change in total cost / change in volume of activity

Variable cost per unit = (750,000 - 525,000) / (10,000 - 6,000)

Variable cost per unit = 225,000 / 4,000 = $56.25

$56.25 x 6000 + fixed cost = $525,000

Fixed cost = $187,500

B) Total mixed cost = $56.25 x units produced + $187,500

C) Total cost = $56.25 x 12,000 + $187,500

Total cost = $862,500

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