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The following observations of output and cost have been made:
Output Cost
Units $8,000 39,400
20,000 68,000It is known that at output levels above 15,000 units, variable cost per unit drops by $1 per unit for all subsequent units produced.
What is the variable cost for each unit of output above 15,000 units?
? $1.80
? $0.97
? $2.80
? $3.40I’m not sure how to first adjust the Cost at 20,000 units before i can apply the high low method. I think I am meant to subtract 15,000 from 20,000 but not sure where to go from there
The basic high low arithmetic only works if the variable cost per unit stays the same.
So, if the variable cost did stay the same at all levels then the cost of 20,000 units would be 5,000 x $1 = $5,000 higher and would be 68,000 + 5,000 = $73,000.
If we then use the normal high low approach, the variable cost per unit is (73,000 – 39,400) / (20,000 – 8,000) = $2.80 per unit.
For levels above 15,000 this falls by $1 per unit for the extra units and therefore falls to $1.80 per unit.
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