High Low Method

Am really struggling with this question, not sure where to start,

Any help would be appreciated

Thanks Emma

Use the high low method to predict the costs at a production level of 8,000 units
Production level

Units Total cost
£
5,000 15,500
7,000 19,500
9,000 23,500
11,000 27,500

Units Cost £




£ Variable unit cost

£ Fixed cost

£ Production cost for 8,000 units

Comments

  • The_Bookkeeper8545The_Bookkeeper8545 Posts: 4Registered
    High 11000 units £27500
    Low 5000 units £15500
    = 6000 units £12000

    £12000/6000 units= £2 variable unit cost
    £2 x 5000 units= £10000 variable cost

    £15500 total cost
    -£10000 variable cost
    =£5500 fixed cost

    8000 units x £2 =£16000 variable cost
    +£5500 fixed cost
    =£21500 total cost
  • rakeshsuwalrakeshsuwal LondonPosts: 79Registered
    edited October 2016
    I don't follow the exact higher and lower method, I use any two. Here take the first two production level cost and use the difference value between them. Below is illustration:
    U= Units
    £= value

    Step 1-
    7000U-5000U= 2000U
    £19500-£15500=£4000
    i.e. 2000U =£4000
    Or 1U= £2 ( this is the variable cost per unit)

    Step 2-
    You should know total variable + total fixed= total cost.
    Or total fixed = total cost- total variable

    Now use this variable unit cost and formula to find a fixed costs by taking Any of the production level figure. All should result in same answer.
    Let's use 5000U=£15500
    Fixed cost = £15500-( 5000×£2)= £15500-£10000 = £5500
    So, £5500 is a fixed cost and will be charged to any production level.

    Step 3-
    Now at last, let's find the cost of 8000U.
    Fixed cost= £5500
    Variable cost= £2×8000=£16000
    Total cost= £21500.
    ;)
  • emmalhemmalh Posts: 2Registered
    Thank you both

    Emma
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