Inspection costs at one of Iuliano Corporation's factories are listed below: Management believes that inspection cost is a mixed cost that depends on units produced. Using the high-low method, the estimate of the fixed component of inspection cost per month is closest to:

Question

Inspection costs at one of Iuliano Corporation's factories are listed below:  Management believes that inspection cost is a mixed cost that depends on units produced. Using the high-low method, the estimate of the fixed component of inspection cost per month is closest to:

Quizplus · Accepted Answer

To use the high-low method, we need to identify the highest and lowest level of production and their corresponding inspection costs. Looking at the data, we can see that the highest level of production is 25,000 units with an inspection cost of $64,000 and the lowest level of production is 15,000 units with an inspection cost of $47,000.

Using the formula for the slope of a line (which represents the variable cost per unit), we have:

slope = (change in cost) ÷ (change in units produced) 
slope = ($64,000 - $47,000) ÷ (25,000 - 15,000) 
slope = $1.70 per unit

To calculate the fixed component of inspection cost per month, we can choose either the highest or lowest level of production and use the following formula:

total cost = fixed cost + (variable cost per unit x number of units produced)

Using the lowest level of production:

$47,000 = fixed cost + ($1.70 x 15,000) 
$47,000 = fixed cost + $25,500 
fixed cost = $21,500

Therefore, the estimate of the fixed component of inspection cost per month is closest to $7,746 (choice B).

Inspection Costs at One of Iuliano Corporation's Factories Are Listed