Question

Handy hiking produces backpacks. In 2007, its highest and lowest production levels occurred in july and january, respectively. In july, it produced 4,000 backpacks at a total cost of $110,000. In january, it produced 2,500 backpacks at a total cost of $87,500. Using the high/low method, the average variable cost of producing a backpack was:

Answer 1

Answer: The average variable cost of producing a backpack is $15.

The formula for calculating the variable cost per unit using the high/low method is:

`Average Variable Cost = (y_(2) - y_(1))/(x_(2) - x_(1))`

where

y₂ : cost at highest level of activity

y₁ : cost at lowest level of activity

x₂ : number of units produced at highest level of activity

x₁ : number of units produced at lowest level of activity

Substituting the values from the question in the formula we get,

`Average Variable Cost = (110000 - 87500)/(4000 - 2500)`

`Average Variable Cost = (22500)/(1500)`

`Average Variable Cost = 15`