Citrus,Inc.used the high-low method to estimate that its fixed costs are $210,000.At its low level of activity,100,000 units,average cost was $2.60 per unit.What would Citrus predict its average cost per unit to be when production is 200,000 units?
A)$1.05
B)$1.55
C)$2.60
D)$5.20

Question

Quizplus · Accepted Answer

First, use the high-low method to find the variable cost per unit:

High cost: Let's assume that at the highest level of production (200,000 units), the average cost per unit is $x. Then, the total cost would be:

Total cost = Fixed cost + (Variable cost per unit x Number of units)
$546,000 = $210,000 + ($x x 200,000)

Solving for x, we get:

$x = $1.68

Low cost: We know that at the low level of production (100,000 units), the average cost per unit was $2.60.

Next, we can use the high-low method formula to find the variable cost per unit:

Variable cost per unit = (High cost - Low cost) / (High level of activity - Low level of activity)
Variable cost per unit = ($1.68 - $2.60) / (200,000 - 100,000)
Variable cost per unit = -$0.92 / 100,000
Variable cost per unit = $0.0092

Finally, we can use the variable cost per unit to find the average cost per unit at 200,000 units:

Total cost = Fixed cost + (Variable cost per unit x Number of units)
Total cost = $210,000 + ($0.0092 x 200,000)
Total cost = $210,000 + $1,840
Total cost = $211,840

Average cost per unit = Total cost / Number of units
Average cost per unit = $211,840 / 200,000
Average cost per unit = $1.059

Therefore, the answer is B) $1.55.