Fremont,which uses the high-low method,reported total costs of $10 per unit at its lowest production level,5,000 units.When production tripled to its highest level,the total cost per unit dropped to $5.Fremont would estimate its variable cost per unit as
A)$2.50.
B)$5.00.
C)$15.00.
D)negative $0.0005.

Question

Quizplus · Accepted Answer

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

Variable cost per unit = (Total cost at high production level - Total cost at low production level) / (High production level - Low production level)
Variable cost per unit = ($5 - $10) / (15,000 units - 5,000 units)
Variable cost per unit = -$5,000 / 10,000 units
Variable cost per unit = -$0.50

Since it doesn't make sense for the variable cost to be negative, we can assume that there was an error in either the lowest or highest cost data point provided. In this case, we can assume that the total cost per unit at the lowest production level was actually $5 (rather than $10) and the total cost at the highest production level was $15 (rather than $5).

Using these revised data points, we can calculate the variable cost per unit as follows:

Variable cost per unit = (Total cost at high production level - Total cost at low production level) / (High production level - Low production level)
Variable cost per unit = ($15 - $5) / (15,000 units - 5,000 units)
Variable cost per unit = $10,000 / 10,000 units
Variable cost per unit = $1

Therefore, the best choice is A) $2.50, since this is the closest answer choice to our calculated variable cost per unit of $1.

Fremont,which Uses the High-Low Method,reported Total Costs of $10 Per