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

Using the high-low method, we need to find out the highest and lowest levels of production, as well as the corresponding inspection costs.

From the data provided, we can see that the highest level of production is 8,000 units, with an inspection cost of $69,200. The lowest level of production is 4,000 units, with an inspection cost of $47,800.

Using these values, we can calculate the variable cost per unit:
Variable cost per unit = Change in cost ÷ Change in production 
= ($69,200 - $47,800) ÷ (8,000 - 4,000) 
= $21,400 ÷ 4,000 
= $5.35 per unit

To find the fixed cost component, we can use either the highest or lowest level of production:

Fixed cost component = Total cost - Variable cost component x Production 
= $47,800 - ($5.35 x 4,000) 
= $25,400

Therefore, the estimate of the fixed component of inspection cost per month is $25,400, which is closest to choice B ($7,746).

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