Sterling Boat Company makes inexpensive aluminum fishing boats. Production is se

Question

Sterling Boat Company makes inexpensive aluminum fishing boats. Production is seasonal, with considerable activity occurring in the spring and summer. Sales and production tend to decline in the fall and winter months. During 2019, the high point in activity occurred in June when it produced 200 boats at a total cost of $720,000. The low point in production occurred in January when it produced 100 boats at a total cost of $450,000.

Required

Use the high-low method to estimate the amount of fixed cost incurred each month by Sterling Boat Company.

Determine the total estimated cost if 150 boats are made.

Explanation / Answer

Variable cost per unit as per high low method

= [Highest cost – Lowest cost] / [Highest quantity – Lowest quantity]

= [$720,000 - $450,000] / [200 – 100]

= $2,700 per unit

So, Fixed cost each month

= Total cost – Variable cost per unit x Quantity

= $720,000 - $2,700 x 200

= $180,000

Or

$450,000 - $2,700 x 100

= $180,000

Total cost of production of 150 boats

= Fixed costs + Variable costs

= $180,000 + $2,700 x 150

= $180,000 + 405,000

= $ 585,000

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