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Sir the previous thread got locked, but I had one last follow up question remaining.
Sir, can we approach the problem another way ? Since High low method require the same variable cost throughout all the units, so instead of adding 5000 to the output above 15,000 -we remove 5000 from the output below 15,000. Maybe the answer we arrive would be $0.8 and then we add back the $1, to get $1.8 ?
It is like the opposite approach. Is this possible ?If this is possible, can you show the calculation ? Because I cannot seem to calculate it to reach $0.8.
If it is not, can you explain the reason why this approach is not suitable ?
You could take that approach (although it is less obvious).
The total cost for 20,000 units is 68,000.
If you remove 5,000 from the cost for 8,000 units then you get 39,400 – 5,000 = 34,400.
So the variable cost is (68,000 – 34,400) / (20,000 – 8,000) = $2.80 and this is the variable cost per unit if the cost had not fallen by $1 as before.
I mean to say how to calculate High low method as if the variable cost per unit had fallen by $1 for all the units, in order to get $0.8 instead of $2.8. Then we add back $1 to get $1.8.
That is why I was suggesting instead of adding $5,000 to the amount, we instead remove it.
Actually, we might have to deal with $15,000 instead of $5,000. But whatever, I cant seem to reach $0.8 any way I try, addition or subtraction.
If the cost per unit fell by $1 for ALL units when the output was more than 15,000, then it would be a completely different problem (and answer!). So I have no idea why you would be expecting to get $0.8 per unit.
To the total cost of 20,000 unit we would add 20,000 x $1 = $20,000.
Then using the high low method, then the variable cost would be (88,000 – 39,400) / (20,000 – 8,000) = $4.05. This would be the variable cost for production of less than 15,000. For production of more than 15,000 the variable cost would be $3.05 per unit.
The problem would remain the same as it was: $1 per unit fell for units above 15,000 (15,000units to 20,000units).
However, as the high low method is not possible unless variable cost per unit remains same for all. The first method you did was to add $5,000 for output above 15,000, to create this equal spread.
However, what I am asking is if it is possible that instead of adding $5,000 to output above 15,000, to remove $15,000 to output below 15,000, in order to create an equal spread another way. And then to still arrive at an answer of $1.8 for units above 15,000.
If this is possible, what is the calculation ?
If this is not possible, what is the explanation?
Apologies for any confusions.
What you typed before was not that it fell for $1 per unit for unites above 15,000 units. You specifically wrote that it was for all units.
I have already given an alternative approach to calculating the original question, and it getting ridiculous to spend more time now having shown you two different ways of arriving at the same answer.
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