Allen Corp. uses the high-low method to estimate how its costs vary with levels of production. For the year, its high production was 10,000 units in a day, at a cost of $80,000, and its low production was 3,000 units, at a cost of $38,000. The equation that best describes this relation is
A) Cost = $10,000 + $6 × Volume
B) Cost = $7 × Volume
C) Cost = $20,000 + $6 × Volume
D) Cost = $38,000 + $6 × Volume

Question

Quizplus · Accepted Answer

First, calculate the variable cost per unit using the high-low method: $ \frac{\$80,000 - \$38,000}{10,000 - 3,000} = \frac{\$42,000}{7,000} = \$6 $ per unit. Then, calculate the fixed cost by subtracting the total variable cost at either level from the total cost at that level: $ \$80,000 - (10,000 \times \$6) = \$80,000 - \$60,000 = \$20,000 $. Thus, the cost equation is $ \text{Cost} = \$20,000 + \$6 \times \text{Volume} $.