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)($5.00)

Question

Quizplus · Accepted Answer

The high-low method involves identifying the highest and lowest levels of activity and using the difference in costs between those levels to calculate the variable cost per unit. In this case, the lowest production level is 5,000 units and the total cost is $10 per unit. The highest production level is three times higher than the lowest level, so it would be 15,000 units. At this level, the total cost per unit is $5.

Using the high-low method:

Variable cost per unit = (Total cost at highest level – Total cost at lowest level) / (Highest level of activity – Lowest level of activity)

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

Therefore, Fremont would estimate its variable cost per unit as $0.50, which is equivalent to $2.50 if we subtract it from the total cost of $5 at the highest production level. The correct choice is A) $2.50.

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