Chi Corp. uses the high-low method to estimate how its costs vary with levels of production. For the year, its high production was 50,000 units in a day, at a cost of $1,000,000, and its low production was 30,000 units, at a cost of $700,000. Its fixed costs are
A) Zero
B) 100000
C) 250000
D) 400000

Question

Quizplus · Accepted Answer

Using the high-low method, we first calculate the variable cost per unit:

Variable cost per unit = (High Cost - Low Cost) / (High units - Low units) = ($1,000,000 - $700,000) / (50,000 - 30,000) = $20

Next, we can use either the high or low production data to calculate the fixed costs. Let's use the low production data:

Fixed costs = Low Cost - (Low units x Variable cost per unit) = $700,000 - (30,000 x $20) = $100,000

Therefore, the fixed costs are $100,000.

Chi Corp Uses the High-Low Method to Estimate How Its Costs