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Hello,
I am struggling to understand one exercise, as I don’t understand why the change in fixed cost gets deducted from the calculation of the variable costs.
The exercise is as follows:
The following shows the total overhead costs for given levels of a company’s total output:
Cost Outputs
£4,000 1000
£7,000 2000
£10,000 3000
£9,500 4000A step up in fixed costs of £500 occurs at an output level of 3,500 units.
What would be the variable overhead cost per unit using the high-low method?
The solution on the book is (£9,500 – £4000 – £500) = £5,000
and then £5000/(4000-1000) = £1.67I thought is was (£9,500 – £4,000)/(4000-1000) = £1.83
I don’t understand why it subtracts the change in fixed costs in the calculations for the variable costs.
Many thanks for your help
The costs of $4000 and $9500 are the total costs at the two levels and so are the total of the variable costs and the fixed costs.
Here, the fixed cost is $500 higher when the output is 4,000 and so $500 of the difference in the total cost is because of this, and only the remaining $5,000 is due to the extra variable cost of the extra 3,000 units. So the variable cost per unit is $5,000/3,000 units = $1.67.
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