ExpertHard2 marksMultiple Choice
ACCA · Question 12 · Budgeting and Control
Section A
LogisSwift operates a fleet of delivery trucks. The total maintenance costs at 10,000 miles were $45,000, and at 20,000 miles were $75,000.
However, management notes that fixed costs step up by $5,000 when activity exceeds 15,000 miles.
Using the high-low method, what is the variable cost per mile?
Section A
LogisSwift operates a fleet of delivery trucks. The total maintenance costs at 10,000 miles were $45,000, and at 20,000 miles were $75,000.
However, management notes that fixed costs step up by $5,000 when activity exceeds 15,000 miles.
Using the high-low method, what is the variable cost per mile?
Answer options:
A.
$3.00
B.
$2.50
C.
$3.50
D.
$2.00
How to approach this question
Before applying the high-low formula, you must adjust the total costs so that the fixed cost element is identical at both activity levels. Subtract the $5,000 step-up from the high activity cost.
Full Answer
B.$2.50✓ Correct
To find the variable cost per unit using high-low with a step-up fixed cost, adjust the high cost to remove the step-up so fixed costs are comparable.
Adjusted High Cost = $75,000 - $5,000 = $70,000.
Variable Cost = (Adjusted High Cost - Low Cost) / (High Activity - Low Activity)
VC = ($70,000 - $45,000) / (20,000 - 10,000) = $25,000 / 10,000 = $2.50 per mile.
Common mistakes
Forgetting to adjust for the step-up fixed cost and simply doing (75k - 45k) / 10k = $3.00.
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