Ouelette Corporation's relevant range of activity is 3,000 units to 7,000 units. When it produces and sells 5,000 units, its average costs per unit are as follows: If 6,000 units are produced, the total amount of indirect manufacturing cost incurred is closest to:
A) $15,000
B) $22,800
C) $7,800
D) $25,800

Question

Ouelette Corporation's relevant range of activity is 3,000 units to 7,000 units. When it produces and sells 5,000 units, its average costs per unit are as follows:  If 6,000 units are produced, the total amount of indirect manufacturing cost incurred is closest to:
A) $15,000 
B) $22,800 
C) $7,800 
D) $25,800

Quizplus · Accepted Answer

To solve, we need to use the high-low method.

First, we calculate the variable cost per unit:

Variable cost per unit = (Cost for 7,000 units – Cost for 3,000 units) / (7,000 units – 3,000 units)

Variable cost per unit = ($64,000 – $28,000) / (7,000 units – 3,000 units) = $9 per unit

Next, we calculate the fixed cost:

Fixed cost = Total cost – (Variable cost per unit x Number of units)

$49,000 = Total cost – ($9 x 5,000 units)

Total cost = $94,000

Finally, we calculate the total indirect manufacturing cost for 6,000 units:

Total indirect manufacturing cost = Fixed cost + (Variable cost per unit x Number of units)

Total indirect manufacturing cost = $49,000 + ($9 x 6,000 units)

Total indirect manufacturing cost = $103,000

Therefore, the closest answer is B) $22,800.

Ouelette Corporation's Relevant Range of Activity Is 3,000 Units to 7,000