Fender Company had the following data for four months.
Total Cost Production Units
January $50,000 1,000
February$53,750 1,150
March $61,250 1,450
April $65,250 1,610
Use the “high-low” method to calculate the estimated variable cost per unit.
A. $25 per unit
B. $44.19 per unit
C. $44.88 per unit
D. $50 per unit
Based on the “high-low” method and the estimated variable cost per unit, what is the estimated fixed cost?
A. $0
B. $15,000
C. $25,000
D. $50,000
I figured out the first part of the question which is $ 25 per unit. I just need help figuring out the second part of the question?
To calculate the estimated fixed cost using the high-low method, you need to follow these steps:
1. Identify the highest and lowest production units and their corresponding costs.
The highest production units were recorded in April with 1,610 units, and the lowest production units were recorded in January with 1,000 units. Note down their respective costs as well.
2. Calculate the variable cost per unit.
Using the high-low method, we can determine the change in cost (ΔC) and the change in production units (ΔP) from the lowest to the highest data points.
ΔC = April Cost - January Cost = $65,250 - $50,000 = $15,250
ΔP = April Units - January Units = 1,610 - 1,000 = 610
Variable cost per unit = ΔC / ΔP = $15,250 / 610 ≈ $25.00
3. Calculate the estimated fixed cost.
To find the estimated fixed cost, we need to use the formula:
Estimated Fixed Cost = Total Cost - (Variable cost per unit × Total Units)
Since we have the variable cost per unit ($25.00), we can choose any month's data to substitute the values. Let's use the January data:
Estimated Fixed Cost = January Cost - (Variable cost per unit × January Units)
= $50,000 - ($25.00 × 1,000)
= $50,000 - $25,000
= $25,000
Therefore, the estimated fixed cost is $25,000. The correct answer for the second part of the question is C. $25,000.