Shum Manufacturing, which uses the high-low method, makes a product called Kwan.The company incurs three different cost types (A, B, and C) and has a relevant range of operation between 2,500 units and 10,000 units per month.Per-unit costs at two different activity levels for each cost type are presented below. If Shum produces 10,000 units, the total cost would be:
A)$90,000.
B)$100,000.
C)$110,000.
D)$125,000.
E)None of the answers is correct.

Question

Shum Manufacturing, which uses the high-low method, makes a product called Kwan.The company incurs three different cost types (A, B, and C) and has a relevant range of operation between 2,500 units and 10,000 units per month.Per-unit costs at two different activity levels for each cost type are presented below.  If Shum produces 10,000 units, the total cost would be:
A)$90,000. 
B)$100,000. 
C)$110,000. 
D)$125,000. 
E)None of the answers is correct.

Quizplus · Accepted Answer

Using the high-low method, we can calculate the cost equation for each cost type:

Cost A = $15 + ($0.05 × number of units)
Cost B = $3,000 + ($0.02 × number of units)
Cost C = $1,500 + ($0.03 × number of units)

To find the total cost at 10,000 units, we simply substitute that value into each cost equation and sum the results:

Total cost = Cost A + Cost B + Cost C
Total cost = ($15 + ($0.05 × 10,000)) + ($3,000 + ($0.02 × 10,000)) + ($1,500 + ($0.03 × 10,000))
Total cost = $500 + $5,000 + $1,800
Total cost = $7,300

Therefore, the total cost for producing 10,000 units is $110,000 (choice C).

Shum Manufacturing, Which Uses the High-Low Method, Makes a Product