ICANManagement InformationCost Classification and Behaviour2022

Abuja Bottling Company uses the high-low method to separate fixed and variable elements from its maintenance costs. The highest activity level was 80,000 bottles at a cost of ₦6,400,000, and the lowest was 50,000 bottles at a cost of ₦4,600,000. What is the estimated fixed cost per month?

A₦1,600,000CORRECT
B₦2,200,000
C₦1,000,000
D₦3,400,000
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Why the answer is A, and why the others tempt you.
Variable cost per unit = (₦6,400,000 − ₦4,600,000) ÷ (80,000 − 50,000) = ₦1,800,000 ÷ 30,000 = ₦60 per bottle. Fixed cost = Total cost at high point − (Variable rate × High activity) = ₦6,400,000 − (₦60 × 80,000) = ₦6,400,000 − ₦4,800,000 = ₦1,600,000.
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