Hardigree Insurance has collected the following information over the last six months. $\begin{array}{ccc}\text { Month }& \text { Units produced } &\text { Total costs }\
\text { March } & 2,000 & \$ 6,700 \
\text { April } & 3,200 & 9,400 \
\text { May } & 2,200 & 7,100 \
\text { June } & 3,000 & 9,500 \
\text { July } & 2,800 & 8,000 \
\text { Auqust } & 2,100 & 6,600
\end{array}$ Using the high-low method, what is the estimated total cost in a month when 3,100 units are produced?

Question

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 April (3,200 units) with total costs of $9,400, and the lowest is in March (2,000 units) with total costs of $6,700. The variable cost per unit is calculated as: $$ \frac{\$9,400 - \$6,700}{3,200 - 2,000} = \frac{\$2,700}{1,200} = \$2.25 \text{ per unit}.$$ To find the fixed cost, we use the total cost equation: $$ \text{Total Cost} = \text{Fixed Cost} + (\text{Variable Cost per Unit} \times \text{Number of Units}).$$ Substituting for March (or any month, but March is used here for simplicity): $$ \$6,700 = \text{Fixed Cost} + (\$2.25 \times 2,000).$$ Solving for Fixed Cost gives: $$ \text{Fixed Cost} = \$6,700 - \$4,500 = \$2,200.$$ To estimate the total cost for 3,100 units: $$ \text{Total Cost} = \$2,200 + (\$2.25 \times 3,100) = \$2,200 + \$6,975 = \$9,175.$$

Hardigree Insurance Has Collected the Following Information Over the Last