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I have a doubt in a question regarding the high low method.
The question is
An organisation has the following total costs at 3 activity levels:
Activity Level (units) 4,000 6,000 7,500
Total Cost $40,800 $50,000 $54,800
Variable cost per unit is constant within this activity range and there is a step up of 10% in the total fixed costs when the activity level exceeds 5,500 units.
What is the total cost at an activity level of 5,000 units?
I wanted to know how to calculate the 10% step up cost from total fixed cost.Best is to use a bit of simple algebra.
If the variable cost is V per unit, and if the fixed cost at levels below 5,500 units is F, then:
4,000V + F = 50,000
and
7,500V + 1.1F = 54,800. (1.1F is the same as F + 0.1F)If you solve the two equations you can get values for V and for F.
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