Production during the current year for California Manufacturing,a producer of high security bank vaults,was at its highest point in the month of June when 80 units were produced at a total cost of $800,000.The lowest point in production was in January when only 20 units were produced at a cost of $440,000.The company is preparing a budget for the current year and needs to project expected fixed cost for the budget year.Using the high-low method,the projected amount of fixed cost per month is:
A) $120,000
B) $320,000
C) $480,000
D) $360,000

Question

Quizplus · Accepted Answer

The high-low method involves using the highest and lowest levels of activity to estimate fixed and variable costs. The variable cost per unit can be calculated by taking the difference in total costs at the high and low activity levels and dividing by the difference in the number of units produced at those levels. $$ \text{Variable Cost per Unit} = \frac{\text{Total Cost at High Level - Total Cost at Low Level}}{\text{Units at High Level - Units at Low Level}} $$$$ = \frac{\$800,000 - \$440,000}{80 - 20} = \frac{\$360,000}{60} = \$6,000 $$To find the fixed cost, we can then subtract the total variable cost at either the high or low level from the total cost at that level. Using the high level for this calculation:$$ \text{Total Variable Cost at High Level} = \text{Variable Cost per Unit} \times \text{Units at High Level} $$$$ = \$6,000 \times 80 = \$480,000 $$$$ \text{Fixed Cost} = \text{Total Cost at High Level} - \text{Total Variable Cost at High Level} $$$$ = \$800,000 - \$480,000 = \$320,000 $$Therefore, the projected amount of fixed cost per month is $320,000.

Production During the Current Year for California Manufacturing,a Producer of High