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ABC Co. manufactures pens. During the most productive month of the year, 3,650 pens were manufactured at a total cost of $84,550. During its slowest month, the company made 1,250 pens at a cost of $46,150. Calculate the total fixed cost using the high-low method of cost estimation.

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Answer:

$26,150

Explanation:

Variable cost per unit = ($84,550 - $46,150) ÷ (3,650 - 1,250) = 16$ per unit

Total cost (TC) = Total Fixed Cost (TFC) + Total Variable Cost (TV) .............. (1)

TVC = Variable cost per unit × Units at any level of activity

If we use highest level of pens production activity, we have:

TVC = $16 * 3,650 = $58,400

Using highest level of pens production activity and substitute into equation (1), we have:

$84,550 = Total Fixed Cost + $58,400

Total Fixed Cost = $84,550 - $58,400 = $26,150

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