MAHigh low method with stepped fixed costs

Hi, I have done on my paper just want to know the answer , Is it 16770? If it is correct I will write to u how I did it ,

hey Actually, I dont have the answer for this question....sorry but i dnt know whether your answer is correct.

hi if u dnt mind,could you also work this out for me. I jst cant seem to understand stepped fixed costs :( A company manufacturing a single product has the following costs at two different activity levels: Activity level (units) 15,000 25,000 Total costs ($) 94,500 151,500 Variable costs are constant at all activity levels, but fixed costs increase by $2,000 every 10,000 units. What are the fixed costs at an activity level of 5,000 units?

For your First question i have answer as 16965 for second question the answer i got is 10000

Could you plz show me how u worked it out?Thanks

Stepped cost is fairly straight forward concept. Once you understand the principle you will see. For that i will say to go through the lecture on this topic. For first question we use the high low method and all we have to do is to apply high low method after taking out the stepped cost which is 5 percent when the activity increases from 3500 onwards. So from cost of 4000 we will take out 5 percent to give us 17825/1.05=16976 Now we can apply high low method using the cost at highest activity and the lowest one to give us unit variable cost which is 16976-10100/4000-2000=3.44 per unit to get the fixed cost we can put this value of variable in any given activity BUT we will put it in 4000 because at that level the stepped cost has already been added into the total cost. IF we put it in the 2000 or 3000 level we will have to add back the stepped cost as well. I hope you understand that so 3.44*4000=13752 and 17825-13752=4072 which is fixed cost. apply those values in 3750 to get 3750*3.44=12900+4072=16972

for second one just think about it for a moment. it says for every 10000 the cost will increase by 2000.. so that means upto 9999 you will have one fixed cost and then from 10000 you will add 2000 to that fixed cost and then again at 20000 you will add another 2000. For our activites per question, we can see that at 25000 level we already would have added 4000 in total in fixed costs and at 15000 we would have added 2000 to the fixed cost.. makes sense? so if we take 2000 out from cost of 25000 we can then apply high low method and get the variable and fixed cost. Now the fixed cost that we will get we take 2000 out to get the fixed cost at 5000 level. Hope you can work it out and understand the logic.

Thank u so much,bt i jst wanted to ask...for d 2nd question...i cant seem to work it out to $10000 as u did...sorry for bothering you,bt can u plz show me the workings for it?Thanks :D

We are here because we want to help each other through this,so no need to say sorry. Ok so like i said we will take 2000 from 25000 level of activity so that we are on the same level as of 15000 in terms of total cost(151500-2000=149500) and then apply high low method. So lets do that and we get 149500-94500/25000-15000=5.5 as variable cost per unit Now we put this into 15000 level to get fixed cost so 5.5*15000=82500 which is total variable cost 94500-82500=12000 which is fixed cost Now remember if 12000 is fixed cost for 15000 level and we know that step cost increase after every 10000, so that means at level of 5000 we have not incurred that step cost yet. (makes sense?) so we take 2000 out from 12000 to get fixed cost for activity level of 5000. Hope its clear now. But again just understand the logic behind it all and will make life easy.

Thank u so much..its makes much sense now..ur definetly a lifesaver :D how many papers r u done with so far?

Had to start from FIA/CAT courses coz didnt have any accounting background, so started last year jan and completed 4 courses of FIA and 3 courses till F3. 7 in total so far and hoping to do another 8 this year. And you are welcome. Glad it made sense

Wow..dats super fast...and wishing u good luck 4 this year too

Thanks and wish you the same and you are welcome as well. Goo luck