ICAEW BIP · Chapter 1 · Question 6 of 10
A company's total production costs were £64,000 at an output of 3,000 units and £108,000 at an output of 7,000 units. Fixed costs rise by £8,000 once output exceeds 5,000 units. The variable cost per unit is constant. What is the variable cost per unit?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) £9.00
Explanation
The step in fixed costs must be removed before applying the high-low method. Adjusted cost at 7,000 units = £108,000 - £8,000 = £100,000. Variable cost per unit = (£100,000 - £64,000) / (7,000 - 3,000) = £36,000 / 4,000 = £9.00. Ignoring the step gives £11.00, which overstates the variable cost.
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