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The total costs incurred at various output levels in a factory have been measured as follows:
Output Total cost
in units $25 5500
30 5400
33 5500
44 6000
48 6500
55 7000What are the variable cost per unit and fixed costs?
Answer : VC- $50 per unit and fixed costs $4,250Here I got a bit confused because for output level 30 the cost was $5400 which was actually a drop in price and then there is an increase for output level 33.
They have used high-low method.
So my question is if there was a drop in price and then an increase for the next output level, then why we didn’t calculate by subtracting the output levels 55 and 44 only ie. (7,000- 6,000)/ (55- 44). Because I mistook it for semi- variable costs.
Also if this wasn’t possible why we didn’t use regression analysis then?
These are semi-variable costs which is why we need to separate the variable and the fixed costs.
With the high-low method we take the highest and lowest of the independent variable (which in this case it the level of output). Therefore we only consider the figures for outputs of 55 and 25.
Changes in prices are irrelevant when using high-low – it assumes that costs per unit do not change.The relationship is not perfectly linear and regression analysis would therefore give better estimates. However, even if the question did not mention to use the high-low method (which it probably would), you could not be expected to use regression analysis on a question such as this because it would take too long given that it could only ever be worth 2 marks in the exam.
Have you watched my free lectures on semi-variable costs? The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.
Yes it would take long, that was silly of me.
I wanted to write stepped fixed costs but I typed semi variable. Actually I mistook it for stepped fixed costs because I saw a drop in price at output level 30 and then a rise in price at output level 33. Also I got a bit confused because the price at 33 was the same as 30. So I couldn’t decide in a hurry while attempting the questions in a time limit for practice.Yes Sir. All thanks to you. It’s all clear now and I’m doing well with mock questions and specimen exam. I’ve also watched your free lectures on specimen exam questions. It’s very clear. Thank you so much Sir. 🙂
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