Ajax uses the high-low method of estimating costs.Ajax had total costs of $50,000 at its lowest level of activity,when 5,000 units were sold.When,at its highest level of activity,sales equaled 12,000 units,total costs were $78,000.Ajax would estimate fixed costs as:
A)$28,000
B)$30,000
C)$64,000
D)$128,000

Question

Quizplus · Accepted Answer

Using the high-low method, we can calculate the variable cost per unit:
Variable cost per unit = (highest total cost - lowest total cost) / (highest activity level - lowest activity level)
Variable cost per unit = ($78,000 - $50,000) / (12,000 units - 5,000 units) = $4 per unit

Then, we can use the formula for total cost:
Total cost = fixed cost + (variable cost per unit x activity level)

We can use the total cost and activity level at the lowest level of activity to solve for fixed cost:
$50,000 = fixed cost + ($4 per unit x 5,000 units)
$50,000 = fixed cost + $20,000
Fixed cost = $30,000

Therefore, the best choice is B, $30,000.

Ajax Uses the High-Low Method of Estimating Costs