high-low method

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GDIPIETRO
GDIPIETRO Registered Posts: 7
in Management Accounting: Decisions and Control
Hi,
I hope you are all OK and safe.
I would like to ask a question regarding high-low method .
How shall I proceed when I have a question similar to the below
Units Cost
25000 575000
20000 450000
fixed costs step up to 50000 when volume exceed 240000.

thanks in advance
G.

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  • PeterC
    PeterC Registered, Tutor Posts: 245 Dedicated contributor 🦉
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    I hope you meant that the fixed costs step up BY £50,000

    Units change from 20,000 to 25,000 an increase of 5,000 units
    Costs change from £450,000 to £575,000 an increase of £125,000 but £50,000 of this is the increase in fixed costs, so variable costs increase by £75,000 (125,000 - 50,000)

    If 5,000 extra units cost £75,000
    then
    1 extra unit costs £15 (£75,000/5,000). This is the variable cost per unit

    When we make 20,000 units, total costs are £450,000
    Variable costs are £300,000 (£15 x 20,000)
    so fixed costs are £450,000 - £300,000 = £150,000

    For more information, try:
    https://drive.google.com/file/d/16cJxznIuhEpxhQ89Itbl4ZehZGXgtvoX/view?usp=sharing
  • GDIPIETRO
    GDIPIETRO Registered Posts: 7
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    Thanks.
    The volume exceed 24000 units not 240000 I have added one extra zero by mistake...sorry!

    Can you please clarify why you choose 20000 units and 450000at the end? Could I have chosen 25000units and 575000,or it would be a mistake?
    Thanks in advance
    G.
  • PeterC
    PeterC Registered, Tutor Posts: 245 Dedicated contributor 🦉
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    Yes, I assumed you meant 24,000

    You can use 25,000 units and £575,000
    This results in fixed costs of £200,000 (because of the £50,000 increase)

  • LouboutinLou1
    LouboutinLou1 Registered Posts: 27 Regular contributor ⭐
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    Could anyone help with practice assessment 3 task 1 part b from the Osborne workbook? I've managed to work out the fixed cost part but can't seem to get the correct answers for variable costs? It's so strange I can seem to work out the one's with two columns but not three ?‍♀️. Any help would be much appreciated ?

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