Manley Co. manufactures office furniture. During the most productive month of the year, 4,500 desks were manufactured at a total cost of $86,625. In its slowest month, the company made 1,800 desks at a cost of $49,500. Using the high-low method of cost estimation, total fixed costs are:
A) $61,875
B) $33,875
C) $24,750
D) cannot be determined from the data given

Question

Quizplus · Accepted Answer

Using the high-low method, we need to find the variable cost per unit first.

Variable cost per unit = (Cost in highest activity level - Cost in lowest activity level) / (Highest activity level - Lowest activity level)
Variable cost per unit = ($86,625 - $49,500) / (4,500 - 1,800)
Variable cost per unit = $37,125 / 2,700
Variable cost per unit = $13.75

Then, we can use either the highest or lowest activity level to find the fixed cost component. Let's use the highest activity level:

Total cost = Fixed cost + Variable cost per unit * Activity level
$86,625 = Fixed cost + $13.75 * 4,500
$86,625 = Fixed cost + $61,875
Fixed cost = $24,750

Therefore, the total fixed cost is $24,750.

Manley Co Manufactures Office Furniture