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Shum Manufacturing, which uses the high-low method, makes a product called Kwan. The company incurs three different cost types (A, B, and C) and has a relevant range of operation between 2,500 units and 10,000 units per month. Per-unit costs at two different activity levels for each cost type are presented below. Type A Type B Type C Total 5,000 units $ 4 $ 9 $ 4 $ 17 7,500 units 4 6 3 13 If Shum produces 10,000 units, the total cost would be:

Sagot :

Answer:

For making 10,000 units

Type A cost =  40,000

Type B Cost = 90,000

Type C Cost = 25,000

Explanation:

Given - Shum Manufacturing, which uses the high-low method, makes a

             product called Kwan. The company incurs three different cost

             types  (A, B, and C) and has a relevant range of operation between  

             2,500 units and 10,000 units per month. Per-unit costs at two

             different activity levels for each cost type are presented below.

                             Type A              Type B                Type C        Total

5,000 units               $4                     $9                       $4              $17

7,500 units                $4                     $6                       $3              $13    

           

To find -  If Shum produces 10,000 units, the total cost would be ?

Proof -

As we know that

Total cost = Variable cost per unit × Units + Fixed Cost

Now,

As per the question ,

Highest Activity unit = 7,500 units

Lowest Activity unit = 5,000 units

Now,

Variable cost per unit = Change in cost / Change in activity unit

= ( Highest Activity cost - Lowest Activity cost ) / ( Highest Activity unit - Lowest Activity unit )

                                            Type A              Type B                Type C      

Highest Activity Cost           30,000              45,000              22,500            

Lowest Activity Cost            20,000              45,000               20,000        

Variable Cost Per unit               4                         0                     1

Fixed Cost                                  0                  90,000                15,000

Now,

                 Statement Showing Total Cost for 10,000 units

Particulars                       Type A                         Type B                    Type C

Variable Cost                   40,000                          0                           10,000

Fixed Cost                              0                               90,000                 15,000

Total                                   40,000                          90,000                 25,000

∴ we get

For making 10,000 units

Type A cost =  40,000

Type B Cost = 90,000

Type C Cost = 25,000

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