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The Question: Berry has recorded the following costs over the last six months
month total cost units produced
‘000 ‘000
1 74.00 3.00
2 72.75 1.75
3 73.25 2.00
4 75.00 2.50
5 69.50 1.50
6 72.75 2.00
Using the high – low method what would be the total cost equation?The answer is Total cost = 65,000 + 3 x Quantity
As per me I am getting answer as 75,000+5.5 x Quantity
Can you please explain Sir
Another question:
The following information relates to the manufacture of product AB in 20X7
units total cost $
200 7000
300 8000
400 8600
For output above 350 units, the variable cost per unit falls by 10%. This fall applies to all units, not just the units above the 350 threshold.What is the cost of producing 450 units in 20X8.
The Answer is:
$9050
Can you please explain this question too
Thanks alot
First question:
You are taking the highest and lowest cost, but you should be taking the highest and lowest production (the independent variable – the cost depends on the production so cost is the dependent variable).
The highest and lowest production is in months 1 and 5, so the variable cost is:
(74.00 – 69.50) / (3.00 – 1.50) = $3 per unitI do suggest that you watch my free lectures on this. The lectures are a complete free course for Paper F2 and cover everything needed to be able to pass the exam well.
Second question:
Use high low for 200 and 300 units, because the variable cost per unit is the same for both.
So…..variable cost per unit (for production below 350 units) = (8,000 – 7,000) / (300 – 200) = $10 per unit, and the fixed cost = $5,000.
So for production of more than 350 units the variable cost per unit is $10 – 10% = $9 per unit.
Therefore for 450 units, the cost is (450 x $9) + 5,000 = $9,050.
(But you don’t actually need to waste time calculating the fixed cost. The cost of 450 units will be the same as the cost for 400 units, plus the extra variable cost of the extra 50 units (because the fixed cost will not change.
$8,600 + (50 x $9) = $9,050 )
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