ExpertMedium1 markMultiple Choice
CPA · Question 39 · Area I: Business Analysis
A company uses the High-Low method to estimate costs. <br/>High Activity: 10,000 units, Total Cost $120,000<br/>Low Activity: 6,000 units, Total Cost $80,000<br/>What is the estimated total cost at 8,000 units?
A company uses the High-Low method to estimate costs. <br/>High Activity: 10,000 units, Total Cost $120,000<br/>Low Activity: 6,000 units, Total Cost $80,000<br/>What is the estimated total cost at 8,000 units?
Answer options:
A.
$90,000
B.
$100,000
C.
$110,000
D.
$96,000
How to approach this question
1. Calculate Variable Rate = (High Cost - Low Cost) / (High Units - Low Units). 2. Calculate Fixed Cost = High Cost - (High Units × Rate). 3. Plug in new units.
Full Answer
B.$100,000✓ Correct
B
Variable Cost per Unit = ($120,000 - $80,000) / (10,000 - 6,000) = $10. Fixed Cost = $120,000 - (10,000 × $10) = $20,000. Total Cost at 8,000 units = $20,000 + (8,000 × $10) = $100,000.
Common mistakes
Calculating variable rate but forgetting to add fixed costs; using average cost per unit.
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