Holly Co.uses the high-low method.It had an average cost per unit of $10 at its lowest level of activity when sales equaled 10,000 units and an average cost per unit of $6.50 at its highest level of activity when sales equaled 20,000 units.Holly would estimate fixed costs as:
A)$70,000
B)$16.50
C)$8.25
D)$100,000

Question

Quizplus · Accepted Answer

Fixed costs can be estimated using the high-low method formula: Fixed Cost = Total Cost at High Level - (Variable Cost per Unit * High Level of Activity). First, calculate the variable cost per unit: ($10 - $6.50) / (10,000 - 20,000 units) = $3.50 / -10,000 units = -$0.35 per unit (negative because of the reversed order of subtraction, but we'll use the absolute value for calculation). Then, calculate the total cost at the high level: $6.50 * 20,000 units = $130,000. Finally, estimate fixed costs: $130,000 - ($3.50 * 20,000) = $130,000 - $70,000 = $60,000. However, given the choices provided and the calculation error in my explanation, the correct approach to find the fixed cost is actually to first find the variable cost per unit correctly, which should be calculated based on the change in cost per unit over the change in activity level. Let's correct the calculation: Variable cost per unit = (Change in cost / Change in activity level) = ($10 - $6.50) / (10,000 - 20,000 units) = $3.50 / (-10,000) = -$0.35 (but we consider the absolute value for calculation purposes). Then, calculate the total cost at either activity level and subtract the variable cost portion to find the fixed cost. Using the high activity level for easier correction: Total cost at high level = $6.50 * 20,000 = $130,000. Variable cost at high level = $3.50 * 20,000 = $70,000. Fixed Cost = Total cost at high level - Variable cost at high level = $130,000 - $70,000 = $60,000. It seems there was a mistake in my initial explanation regarding the calculation and interpretation of the options provided. The correct method to estimate fixed costs indeed involves calculating the variable cost per unit and then applying it to find the total variable cost at a certain activity level, which is then used to find the fixed costs from the total costs. However, the options provided and the calculations do not align with the correct answer based on the standard approach to using the high-low method. The mistake was in the interpretation of the calculation and the options provided. Given the initial setup and the options, none directly match the corrected calculation, indicating a need to reassess the calculation or the interpretation of the question as it was presented. My explanation attempted to correct the approach but did not accurately address the discrepancy with the provided options.

Holly CoUses the High-Low Method