Winston,which uses the high-low method,had an average cost per unit of $10 at its lowest level of activity when sales equaled 10,000 units and an average cost per unit of $6.50 at its highest level of activity when sales equaled 20,000 units.What would Winston estimate its total cost to be if sales equaled 8,000 units?
A)$24,000
B)$52,000
C)$70,000
D)$94,000

Question

Quizplus · Accepted Answer

Using the high-low method, we can calculate the variable cost per unit as follows:

Variable cost per unit = Change in cost ÷ Change in activity
Variable cost per unit = ($6.50 - $10) ÷ (20,000 - 10,000)
Variable cost per unit = -$0.35

Note that the negative sign indicates a decrease in cost per unit as activity increases.

Next, we can use the average total cost at either the highest or lowest level of activity and the variable cost per unit to calculate the fixed cost. Let's use the lowest level of activity:

Average total cost at lowest level of activity = $10
Variable cost per unit = -$0.35
Fixed cost = $10 - ($0.35 × 10,000)
Fixed cost = $6,500

Now, we can use the estimated total cost formula to estimate the total cost at 8,000 units:

Estimated total cost = Fixed cost + (Variable cost per unit × Activity level)
Estimated total cost = $6,500 + (-$0.35 × 8,000)
Estimated total cost = $6,500 - $2,800
Estimated total cost = $3,700

Therefore, Winston would estimate its total cost to be $3,700 if sales equaled 8,000 units. The closest answer choice is D, $94,000, which is clearly too high.

Winston,which Uses the High-Low Method,had an Average Cost Per Unit