Example 1
The following data relates to a company’s overhead cost.
Time Output Overhead cost Price
(units) ($) index
2 years ago 1,000 3,700 121
current year 3,000 13,000 155
Using the high low technique, what is the variable cost per unit (to the nearest $0.01) expressed in current year
prices?
A $3.22
B $4.13
C $4.65
D $5.06
The question relates to study guide references A3h and C2n.
The correct answer is B. This is calculated by firstly adjusting the overhead cost from 2 years ago to current price
levels by multiplying by 155/121, to obtain a cost of $4,740. This figure is then used in a high low calculation
(change in cost divided by change in activity) to obtain the variable cost per unit (($13,000 - $4,740) / (3,000
units – 1,000 units) = $4.13).
Question when I multiply or divide 155/121, Do not obtain $4,740, Could you kindly explain how did they work out the figure $4,740 to adjust for inflation ?