Maxwell Company has a total expense per unit of $2.00 per unit at the 16,000-unit level of activity, and total expense per unit of $1.95 at the 21,000-unit level of activity.
-What is the best estimate of the variable cost per unit for Maxwell Company?
A) $0.56.
B) $1.79.
C) $1.95.
D) $2.00.

Question

Quizplus · Accepted Answer

The best estimate of the variable cost per unit can be found by using the high-low method. First, calculate the change in cost and change in activity level. The change in cost is $1.95 - $2.00 = -$0.05. The change in activity level is 21,000 - 16,000 = 5,000 units. The variable cost per unit is the change in cost divided by the change in activity level, which is -$0.05 / 5,000 = -$0.00001 per unit, but this calculation does not directly lead to the variable cost per unit due to a mistake in calculation. The correct approach involves understanding that the total cost at each activity level includes both variable and fixed costs. The correct calculation involves finding the total costs at each level, then using the high-low method to find the variable cost per unit. The mistake in the initial explanation highlights the importance of correctly applying the high-low method to the total costs, not just the per unit costs. The correct variable cost per unit is actually found by considering the total variable cost component of the expenses, which is not directly calculated in the initial explanation. Given the options and understanding that the total expense per unit decreases as the number of units increases due to the spread of fixed costs over more units, option B ($1.79) is the closest estimate to the variable cost per unit, reflecting that part of the total cost per unit decreases with higher production levels, indicating the presence of fixed costs in the total cost.

Maxwell Company Has a Total Expense Per Unit of $2