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Question 5: Cost structure estimation month activity volume in units total...

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Accounting

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.

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