The following costs were incurred at two activity levels: 4,000 units cost £36,000 and 7,000 units cost £48,000. Using the high-low method, what is the variable cost per unit?
Answer and explanation
Correct answer: A. £4
- Step 1: Change in cost = £48,000 − £36,000 = £12,000.
- Step 2: Change in activity = 7,000 − 4,000 = 3,000 units.
- Step 3: Variable cost per unit = £12,000 ÷ 3,000 = £4.
Answer
£4.
Why not the others: £9: This is the cost per unit at the low level (£36,000 ÷ 4,000), not the variable cost. £7: This is the average cost per unit at the high level and not the change in cost per additional unit. £0.25: This divides the change in activity by the change in cost, inverting the fraction.
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