Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 21

Peppers Lockdown produces keys for homes and cars. As Peppers is planning for next year’s production, he decided to implement a high-low system to forecast future costs. With total production of 2,500,000 keys at a total cost of $10,000, in 2009, and total production of 3,000,000 keys at a total cost of $20,000 in 2010 what is the variable cost per key?

Step 1 of 3

High-low method

This method is particular used in the cost accounts to separate the fixed cost and the variable cost from the total cost. Under this method highest level of activity and the lowest level of activity is taken and comparing the total cost at each level. Under this first we determine the variable cost per unit by applying formulae and then we calculate fixed cost and accordingly decision are taken from the result.