Fan Corp. uses the high-low method to estimate how its costs vary with levels of production. For the year, its high production was 5,000 units in a day, at a cost of $180,000, and its low production was 4,000 units, at a cost of $160,000. Its fixed costs equal
A) Zero
B) 50000
C) 80000
D) 100000

Question

Quizplus · Accepted Answer

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

Variable cost per unit = (Cost at high production - Cost at low production) / (High production - Low production)
Variable cost per unit = ($180,000 - $160,000) / (5,000 units - 4,000 units)
Variable cost per unit = $20,000 / 1,000 units
Variable cost per unit = $20 per unit

Once we have the variable cost per unit, we can use either the cost at high production or the cost at low production to calculate the fixed costs. Let's use the cost at high production:

Total cost at high production = Fixed costs + (Variable cost per unit x Number of units)
$180,000 = Fixed costs + ($20 x 5,000 units)
$180,000 = Fixed costs + $100,000
Fixed costs = $180,000 - $100,000
Fixed costs = $80,000

Therefore, the fixed costs for Fan Corp. are $80,000. The answer is choice C).

Fan Corp Uses the High-Low Method to Estimate How Its Costs