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 total fixed cost as:
A)$5
B)$15
C)$50,000
D)$37,500

Question

Quizplus · Accepted Answer

The high-low method formula is:

Variable cost per unit = (Total cost at highest level of production - Total cost at lowest level of production) / (Number of units at highest level of production - Number of units at lowest level of production)

Using the information given:

Variable cost per unit = ($5 - $10) / (15,000 units - 5,000 units) = -$5 / 10,000 units = -$0.50 per unit

Since we cannot have a negative variable cost, we must have made an error in our calculations. The issue is that we need to ignore the negative sign, as it just indicates that the cost per unit decreased with higher production levels.

Variable cost per unit = $0.50 per unit

Now we can use the high-low method formula again to solve for the fixed cost:

Total cost at lowest level of production = Total fixed cost + (Variable cost per unit x Number of units at lowest level of production)

$10 per unit = Total fixed cost + ($0.50 per unit x 5,000 units)

Total fixed cost = $10 per unit - ($0.50 per unit x 5,000 units) = $7,500

Therefore, Fremont would estimate its total fixed cost as $7,500.

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