The following information was available about supplies cost for the second quarter of the year: $$\begin{array} { c c c }
\text { Month } & \text { Production Volume } & \text { Supplies Cost } \
\text { July } & 700 & \$ 3,185 \
\text { August } & 1,600 & 7,100 \
\text { September } & 600 & 2,700
\end{array}$$ Using the high-low method, the estimate of supplies cost at 1,000 units of production is
A)$2,700.
B)$4,460.
C)$4,900.
D)$7,100.

Question

The following information was available about supplies cost for the second quarter of the year: $$\begin{array} { c c c } 
\text { Month } & \text { Production Volume } & \text { Supplies Cost } \
\text { July } & 700 & \$ 3,185 \
\text { August } & 1,600 & 7,100 \
\text { September } & 600 & 2,700
\end{array}$$ Using the high-low method, the estimate of supplies cost at 1,000 units of production is
A)$2,700.
B)$4,460.
C)$4,900.
D)$7,100.

Quizplus · Accepted Answer

The high-low method involves identifying the highest and lowest activity levels and using them to estimate variable and fixed costs. Here, the highest activity level is in August (1,600 units) with a cost of $7,100, and the lowest is in September (600 units) with a cost of $2,700. The variable cost per unit (VCU) is calculated as: $$VCU = \frac{\text{Cost at highest activity level} - \text{Cost at lowest activity level}}{\text{Highest activity level} - \text{Lowest activity level}} = \frac{7,100 - 2,700}{1,600 - 600} = \frac{4,400}{1,000} = 4.4$$ The fixed cost (FC) is then found by subtracting the total variable cost at either activity level from the total cost at that level. Using the highest activity level for simplicity: $$FC = \text{Total cost} - (\text{VCU} \times \text{Activity level}) = 7,100 - (4.4 \times 1,600) = 7,100 - 7,040 = 60$$ To estimate the supplies cost at 1,000 units of production: $$Estimated cost = FC + (VCU \times \text{Desired activity level}) = 60 + (4.4 \times 1,000) = 60 + 4,400 = 4,460$$

The Following Information Was Available About Supplies Cost for the Second