ExpertMedium1 markMultiple Choice
CPA · Question 19 · Area I: Business Analysis
A company uses the high-low method to estimate costs. <br/>- High activity month: 10,000 units, Total Cost $120,000<br/>- Low activity month: 6,000 units, Total Cost $80,000<br/><br/>What is the estimated total cost for a month with 8,000 units?
A company uses the high-low method to estimate costs. <br/>- High activity month: 10,000 units, Total Cost $120,000<br/>- Low activity month: 6,000 units, Total Cost $80,000<br/><br/>What is the estimated total cost for a month with 8,000 units?
Answer options:
A.
$90,000
B.
$96,000
C.
$100,000
D.
$104,000
How to approach this question
1. Calculate Variable Rate (Change in Cost / Change in Units). 2. Calculate Fixed Cost using High or Low point. 3. Plug in new volume.
Full Answer
C.$100,000✓ Correct
C
1. Variable Rate = ($120,000 - $80,000) / (10,000 - 6,000) = $10 per unit.<br/>2. Fixed Cost = $120,000 - (10,000 x $10) = $20,000.<br/>3. Estimate for 8,000 units = $20,000 + (8,000 x $10) = $100,000.
Common mistakes
Calculating simple average; arithmetic errors.
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