Fixed cost per unit is $7 when 25,000 units are produced and $5 when 35,000 units are produced. What is the total fixed cost when nothing is produced?
A)$130,000
B)$200,000
C)$12
D)$175,000

Question

Quizplus · Accepted Answer

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

Variable cost per unit = (Cost at high volume - Cost at low volume)/(High volume - Low volume) 
Variable cost per unit = ($5 - $7)/(35,000 - 25,000) 
Variable cost per unit = -$0.20

Note that we have a negative variable cost per unit. This may seem counterintuitive, but it simply means that as production increases, the fixed costs are spread over more units, leading to a lower total cost per unit.

Using this variable cost per unit, we can calculate the total fixed cost:

Total cost = Total variable cost + Total fixed cost 
Total cost = ($0/unit x Q) + Total fixed cost

For the low volume (Q=25,000): 
$7/unit x 25,000 units = $175,000 total cost 
($0/unit x 25,000 units) + Total fixed cost = $175,000 
Total fixed cost = $175,000

Therefore, the total fixed cost when nothing is produced would still be $175,000.

Fixed Cost Per Unit Is $7 When 25,000 Units Are