Page 177 - P1 Integrated Workbook STUDENT 2018

Forecasting

Example 1

Jayco has the following data for its production levels and costs from last year:

Month Output Cost ($)
1 2,000 24,950
2 2,500 30,500
3 1,000 15,000
4 4,000 44,900
5 6,000 65,000
Use the high-low method to predict costs for month 1 next year when
output is predicted to be 3,000 units.

Solution

Choose the highest (6,000) and lowest (1,000) levels of output.

Variable cost per unit = change in costs/change in activity levels

For Jayco = ($65,000 – $15,000)/(6,000 – 1,000)

= $50,000/5,000

= $10 per unit of output

Total fixed cost = total costs – total variable cost

For Jayco using high level

Fixed cost = $65,000 – 6,000 × $10

= $65,000 – $60,000 = $5,000

At low level (to prove you get the same result)

Fixed cost = $15,000 – (1,000 × $10)

= $15,000 – $10,000 = $5,000

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