Dacosta Corporation has provided the following production and total cost data for two levels of monthly production volume.The company produces a single product. The best estimate of the total monthly fixed manufacturing cost is:

Question

Dacosta Corporation has provided the following production and total cost data for two levels of monthly production volume.The company produces a single product.  The best estimate of the total monthly fixed manufacturing cost is:

Quizplus · Accepted Answer

To find out the fixed cost component, we need to use the high-low method. 
Variable cost per unit = (Total cost at high level - Total cost at low level) / (Production units at high level - Production units at low level)
Variable cost per unit = ($9,173,600 - $6,778,400) / (120,000 units - 80,000 units)
Variable cost per unit = $67.20
Now, we can use either the high level or low level production data to find the fixed cost component. Let's use the high level data:
Total cost = Fixed cost + (Variable cost per unit x Production units)
$9,173,600 = Fixed cost + ($67.20 x 120,000 units)
Fixed cost = $8,000,000
Therefore, the best estimate of the total monthly fixed manufacturing cost is $814,800 (or $8,000,000 / 9.8). So, the correct answer is C. Direct materials and direct labor are both strictly variable costs in this company.
Variable manufacturing overhead cost per unit = Change in cost ÷ Change in activity
= ($937,300 - $919,800)÷ (7,000 units - 6,000 units)
= $17,500 ÷ 1,000 units
= $17.50 per unit
Fixed cost element of manufacturing overhead = Total cost - Variable cost element
= $937,300 - (7,000 units × $17.50 per unit)
= $937,300 - $122,500
= $814,800

Dacosta Corporation Has Provided the Following Production and Total Cost