Question

Gamach Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for $104.50 per unit. Sales volume (units) Cost of sales Selling and administrative costs 5,000 6,000 $295,000 $354,000 $186,000 $202,800 The best estimate of the total monthly fixed cost is: Multiple Choice $518,900 $481,000 Loooo $102,000 $556,800

Answer 1

Ans.	Option 3rd   $102,000
	*Working Notes:
	*Calculations of Total cost
	Sales volume	5000	6000
	Cost of sales	$295,000	$354,000
	Selling and administrative costs	$186,000	$202,800
	Total cost	$481,000	$556,800
	*Now we need to use the High low method to calculate fixed cost.
	High Low Method:
	Variable cost per unit = (Highest cost - Lowest cost) / (Highest units - Lowest units)
	($556,800 - $481,000) / (6,000 - 5,000)
	$75,800 / 1,000
	$75.80 per unit
	*As we have calculated the variable cost per unit so it is very easy to find out the value of total
	monthly fixed cost.
	We can use either highest values (units and costs) or lowest values for the calculation of fixed cost,
	as it would result the same.
	Fixed cost =   Total cost - (Units * Variable cost per unit)
		Lowest	Highest
		$481,000 - (5,000 * $75.80)	$556,800 - (6,000 * $75.80)
		$481,000 - $379,000	$556,800 - $454,800
		$102,000	$102,000
	So the fixed cost is $102,000.