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How do I use the high-low method in the context of step cost?
This is an example question:
ABC Ltd has the following total costs at three activity levels in respect of Product Y
Activity level (units) 4,000 6,000 7,500
Total cost £140,800 £150,000 £154,800
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.
Required
What is the total cost at an activity level of 5,000 units? Show all workingsAssuming that you have copied all of the figures correctly, then this is either a very bad question indeed or there is a typing error in your book.
In general we would take the following approach:
Because the variable cost is constant within the whole range, we can use the high – low method on the activity levels 6,000 and 7,500 (because they are both more than the 5,500 where the step-up occurs).
Using these two gives a variable cost of $3.20 and a fixed cost of $130,800.This is the fixed cost for levels above 5,500 (after an increase of 10%). So the fixed cost for levels below 5,500 is 100/110 x 130,800 = $118,909
Therefore the total cost at a level of 5,000 = (5,000 x 3.20) + 118,909 = 134,909
This is obviously impossible (because it cannot be lower than the total cost for 4,000 units) which is why I wrote my first sentence.
Yes, I was thinking the same about this question too. It came up in the 2023 paper for the final year exam for first year.
I am not sure which exam you are talking about. However the question as it stands is not valid.
This question was in my uni exam for 2023. It was for the end of year exam as well.
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