Financial Performance

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beavis182
beavis182 Registered Posts: 130 Dedicated contributor 🦉
in AAT Level 4 (Level 8 in Scotland)
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? :-)

Comments

  • rekha0303
    rekha0303 Registered Posts: 7 New contributor 🐸
    Options
    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

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