Financial Performance

beavis182

I am struggling with the high/low methods and working out how to find the fixed costs.

The questions and answers I have so far are.....

Option 1 - Increase Prices
Selling price per unit 0.43
Estimated sales in units 1100000
Total costs 438000

Option 2 - Reduce prices
Selling price per unit 0.39
Estimated sales units 1500000
Total costs 550000

The answers I have so far to work out the variable cost per unit is......

Units Cost
High 1500000 550000
Low 1100000 438000
Difference 400000 112000

Variable (112000/400000) = 0.28 per unit

I just need to understand how to work out fixed costs based on high sales units and low sales units if anyone can help me? :-)

rekha0303

Hiya,

Units Cost
High 1500000 units £550000
Low 1100000 units £ 438000

Variable costs = (550000 - 438000) / (1500000 - 1100000) = 112000 / 400000 =£0.28 per unit

Remember the formula:

Y = mX + C where

Y is the total cost
m is the variable cost
X is the quantity or unit
C is the fixed cost

To find the fixed cost which is C you have to make C the subject of the formula,ie,

C = Y - mX

Now working with High 1500000 units £550000 and variable cost per unit £0.28

Y= £550000, m = £0.28 and X = 1500000

C = Y - mX

C = £550000 - (0.28 * 1500000) = £550000 - £420000 = £ 130000

Therefore fixed cost = £130000

Now you also work with the 1100000 units £ 438000 Variable cost per unit =£0.28

Y= £438000, m = £0.28 and X = 1100000

C = Y - mX

C = £438000 - (0.28 * 1100000) = £438000 - £308000 = £ 130000

Therefore fixed cost = £130000


Whether you work with the high or low data you will have the same final result for fixed cost.

Hope this helps!

Cheers

Rekha