Lark,which uses the high-low method,had total costs of $25,000 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 $39,000.Lark would estimate fixed costs as:
A)$14,000
B)$15,000
C)$32,000
D)$60,000

Question

Quizplus · Accepted Answer

Using the high-low method, we can estimate the variable cost per unit:

Variable cost per unit = (Total cost at highest level of activity - Total cost at lowest level of activity) / (Highest level of activity - Lowest level of activity)
Variable cost per unit = ($39,000 - $25,000) / (12,000 - 5,000)
Variable cost per unit = $14,000 / 7,000
Variable cost per unit = $2

Once we know the variable cost per unit, we can use the total cost equation to solve for fixed cost:

Total cost = Fixed cost + (Variable cost per unit x Units sold)

Using the information from the lowest level of activity:

$25,000 = Fixed cost + ($2 x 5,000)

$25,000 = Fixed cost + $10,000

Fixed cost = $25,000 - $10,000

Fixed cost = $15,000

Therefore, Lark would estimate fixed costs as $15,000.

Lark,which Uses the High-Low Method,had Total Costs of $25,000 at Its