In applying the high-low method, what is the unit variable cost?
A) $1.44
B) $1.25
C) $1.60
D) Cannot be determined from the information given.

Question

In applying the high-low method, what is the unit variable cost? 
A) $1.44 
B) $1.25 
C) $1.60 
D) Cannot be determined from the information given.

Quizplus · Accepted Answer

The high-low method involves selecting the two extreme points of activity levels (i.e., highest and lowest) and using the change in total cost and activity level to determine the unit variable cost.

Let's assume the following data for the purpose of illustration:

Activity level for lowest point: 500 units
Total cost for lowest point: $1,000
Activity level for highest point: 1,000 units
Total cost for highest point: $1,750

Using the high-low method, the change in total cost is $750 ($1,750 - $1,000) and the change in activity level is 500 units (1,000 - 500). Therefore, the unit variable cost is $1.50 ($750 ÷ 500 units).

However, none of the answer choices match $1.50. In this case, we would need to round to the closest answer choice. The closest answer choice is B, $1.25.

Note that the unit variable cost represents the cost per unit that can be attributed to the variable costs (i.e., costs that change with the level of activity, such as direct materials or direct labor). The fixed costs (i.e., costs that do not change with the level of activity, such as rent or salaries) are then determined by subtracting the total variable costs from the total costs.

In Applying the High-Low Method, What Is the Unit Variable