Question 5: Cost structure estimation

month	activity volume in units	total costs
Oct	80	$6,145
Nov	75	$6,250
Dec	105	$7,150

a) Which cost structure estimation method should we use?

high-low methodaccount classification method

b) To identify the low and high points, we should look for

lowest/highest activitylowest/highest costs

c) Estimate the cost structure parameters: total FC= unit VC= Write down the total cost equation TC = + * volume d) Predict the total costs of producing 90 units: TC = e) Can we use the estimates from (c) to predict costs at volume of 5,000 units?

NO: 5,000 units is outside the relevant range (the normal range of activity is around 75-105 units).YES: Just plug in volume=5,000 in the total cost equation.

TC = e) Can we use the estimates from (c) to predict costs at volume of 5,000 units?

NO: 5,000 units is outside the relevant range (the normal range of activity is around 75-105 units).YES: Just plug in volume=5,000 in the total cost equation.