Winston uses the high-low method.It had an average cost per unit of $10 at its lowest level of activity when sales equaled 10,000 units and an average cost per unit of $6.50 at its highest level of activity when sales equaled 20,000 units.What would Winston estimate its total cost to be if sales equaled 8,000 units?
A)$24,000
B)$52,000
C)$70,000
D)$94,000

Question

Quizplus · Accepted Answer

Using the high-low method, we can calculate the variable cost per unit:

Variable cost per unit = (Highest cost - Lowest cost) / (Highest activity level - Lowest activity level)
Variable cost per unit = ($6.50 - $10) / (20,000 - 10,000)
Variable cost per unit = -$0.35 per unit (note: this negative value is likely due to rounding)

We can then use the lowest level of activity to calculate the fixed cost:

Fixed cost = Total cost - (Variable cost per unit x Total activity level)
$10 = Total cost - (-$0.35 x 10,000)
Total cost = $13,500

Now we can use the estimated sales level of 8,000 units to calculate the total cost:

Total cost = Fixed cost + (Variable cost per unit x Sales level)
Total cost = $13,500 + (-$0.35 x 8,000)
Total cost = $11,700

Therefore, the best choice is D) $94,000

Winston Uses the High-Low Method