The following data for a production department relate to two accounting periods: The best estimate of the fixed departmental cost is closest to:
A)$5,250
B)$59,500
C)$187,000
D)$246,500

Question

The following data for a production department relate to two accounting periods:  The best estimate of the fixed departmental cost is closest to:
A)$5,250 
B)$59,500 
C)$187,000 
D)$246,500

Quizplus · Accepted Answer

To find the fixed cost of the department, we need to use the high-low method. 
First, we need to find the variable cost per unit:
Variable cost per unit = (Total cost at high activity level - Total cost at low activity level) / (High activity level - Low activity level)
Variable cost per unit = (815,000 - 625,000) / (50,000 - 30,000) = $10 per unit

Next, we can use either the high or low activity level to find the fixed cost:
Using the high activity level:
Total cost = Fixed cost + (Variable cost per unit x Activity level)
815,000 = Fixed cost + (10 x 50,000)
Fixed cost = 815,000 - 500,000 = $315,000

Using the low activity level:
Total cost = Fixed cost + (Variable cost per unit x Activity level)
625,000 = Fixed cost + (10 x 30,000)
Fixed cost = 625,000 - 300,000 = $325,000

Taking the average of the two fixed cost estimates, the best estimate of the fixed departmental cost is:
($315,000 + $325,000) / 2 = $320,000
The closest option is C: $187,000.

The Following Data for a Production Department Relate to Two