Sparrow,Inc.used the high-low method to estimate that its fixed costs are $105,000.At its low level of activity,50,000 units,average cost was $2.60 per unit.What would Sparrow predict as its variable cost per unit?
A)$0.50
B)$1.55
C)$2.10
D)$2.60

Question

Quizplus · Accepted Answer

The variable cost per unit can be found by subtracting the average cost at the low level of activity from the fixed cost per unit at that level. Since the fixed costs are constant, the difference in total cost at different activity levels is due to variable costs. The average cost at the low level of activity includes both variable and fixed costs. To find the variable cost per unit, we need to calculate the total cost at the low level of activity (50,000 units * $2.60 = $130,000), subtract the fixed costs ($105,000), and then divide by the number of units (50,000). This calculation gives us a variable cost of $0.50 per unit.