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Greetings sir,
Hope you are fine.
I do not understand the logic behind the calculation of the high low method keeping in consideration the change in variable cost per unit, within 3b.20. How do we get the variable cost per unit as $1.80.
Please explain how do we reach the answer with a generous explanation and break down.
Greatly appreciated.The difference between the two total costs of $28,600 is the difference in the total variable cost given that the fixed cost will remain unchanged.
However, the total variable cost for 20,000 units will be lower because for the 5,000 units above 15,000 the cost is $1 per unit less. So the total variable cost would be $5,000 higher if there had not been the reduction.
So if there had not been this reduction the difference between the two total costs would have been 28,600 + 5,000 = $33,600. That would give a variable cost per unit (again without the reduction) of 33,600 / (20,000 – 8,000) = $2.80 per unit.
The question asks for the variable cost for each unit produced over the 15,000, and so they would be $1 per unit less and be $1.80 per unit.
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