Alpert Corp. uses the high-low method to estimate how its costs vary with levels of production. For the year, its high production was 100,000 units in a day, at a cost of $900,000, and its low production was 25,000 units, at a cost of $525,000. The equation that best describes this relation is
A) Cost = $5 × Volume
B) Cost = $400,000 + $5 × Volume
C) Cost = $100,000 + $6 × Volume
D) Cost = $300,000 + $6 × Volume

Question

Quizplus · Accepted Answer

The high-low method calculates the variable cost per unit by dividing the change in total cost by the change in volume of activity. Here, the change in cost is $900,000 - $525,000 = $375,000, and the change in volume is 100,000 units - 25,000 units = 75,000 units. So, the variable cost per unit is $375,000 / 75,000 units = $5 per unit. To find the fixed cost, we can use either the high or low point: $900,000 - ($5 * 100,000) = $400,000 or $525,000 - ($5 * 25,000) = $400,000. Therefore, the cost equation is Cost = $400,000 + $5 × Volume.