Ziegler Inc. has decided to use the high-low method to estimate the total cost and the fixed and variable cost components of the total cost. The data for various levels of production are as follows:

Units Produced Total Costs
80,000 $25,100,000
92,000 27,206,000
120,000 32,120,000

a. Determine the variable cost per unit and the total fixed cost.
b. Based on part (a), estimate the total cost for 115,000 units of production.

a. $175.50 and $11,060,000

b. $31,242,500

Explanation:

The computation of the fixed cost and the variable cost per unit by using high low method is shown below:

Variable cost per units = (High total cost - low total cost) ÷ (High units produced - low units produced)

= ($32,120,000- $25,100,000) ÷ (120,000 units - 80,000 units)

= $7,020,000 ÷ 40,000 units

= $175.50

Now the fixed cost equal to

= High total cost - (High units produced × Variable cost per unit)

= $32,120,000 - (120,000 units × $175.50)

= $32,120,000 - $21,060,000

= $11,060,000

Now the estimated total cost is would be

= Fixed cost + expected units of production × variable cost per unit

= $11,060,000 + 115,000 units × $175.50

= $11,060,000 + $20,182,500

= $31,242,500

The correct answer for option (a) is $175.5/unit and $11,060,000 and for option (b) is $31,242,500.

Explanation:

According to the scenario, the computation of following given data are as follows:

(a). Variable cost can be calculated by using following formula:

Variable cost = [Total cost at highest level -Total cost at lowest level] ÷ (Highest level units - Lowest level units)

By putting the value we get,

Variable cost = ( $32,120000 - $25,100,000) ÷ (120,000 - 80,000)

=$175.5/unit

Fixed cost can be calculate by using following formula:

Fixed cost = Total cost at highest level - ( Variable cost × Highest level units )

By putting the value we get,

Fixed cost = $32,120,000 - ($175.5 × 120,000)

= $11,060,000

(b). Total cost can be calculated by using following formula:

Total cost = Fixed cost + ( Variable cost × Units of production )

By putting the value we get,

Total cost = $11,060,000 + ($175.5 × 115,000)

= $31,242,500.

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