Using the high-low data in which 4,000 units cost £36,000 and 7,000 units cost £48,000, what is the estimated total cost of producing 5,500 units?
Answer and explanation
Correct answer: B. £42,000
- Step 1: Variable cost per unit = (£48,000 − £36,000) ÷ 3,000 = £4.
- Step 2: Fixed cost = £36,000 − (4,000 × £4) = £20,000.
- Step 3: Total cost at 5,500 units = £20,000 + 5,500 × £4 = £42,000.
Answer
£42,000.
Why not the others: £58,000: This adds the variable cost of 5,500 units to the total cost at 4,000 units and so counts the 4,000 units twice. £49,500: This multiplies by the low-level average cost per unit and ignores the cost structure. £22,000: This includes only variable costs and leaves out the fixed cost of £20,000.
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