Meadow uses the high-low method.It had total costs of $500,000 at its lowest level of activity when 5,000 units were sold.When,at its highest level of activity,sales equaled 12,000 units,total costs were $780,000.Meadow would estimate fixed costs as:
A)$280,000
B)$300,000
C)$640,000
D)$1,200,000

Question

Quizplus · Accepted Answer

Using the high-low method, the first step is to calculate the variable cost per unit:

Variable cost per unit = (highest total cost - lowest total cost) / (highest activity level - lowest activity level)
Variable cost per unit = ($780,000 - $500,000) / (12,000 - 5,000)
Variable cost per unit = $280,000 / 7,000
Variable cost per unit = $40

Next, we can use the formula for total cost:

Total cost = fixed cost + (variable cost per unit × activity level)

Using the lowest level of activity (5,000 units), we can solve for fixed cost:

$500,000 = fixed cost + ($40 × 5,000)
$500,000 = fixed cost + $200,000
Fixed cost = $500,000 - $200,000
Fixed cost = $300,000

Therefore, the estimated fixed cost for Meadow is $300,000 (choice B).

Meadow Uses the High-Low Method