Question

Kim Jungemann, owner of Tulip Time, operates a local chain of floral shops Each shop has its own delivery van instead of charging a flat delivery foe, Jungemann wants to set the delivery fee based on the distance driven to deliver the flowers. Jungemann wants to separate the foxed and variable portions of her van operating costs so that she has a better idea how delivery distance affects these costs. She has the following data from the past seven months (Click the icon to view the data) Use the high low method to determine Tulip Time's cost equation for van operating costs. Use your results to predict van operating costs at a volume of 16,500 miles Let's begin by determining the formula that is used to calculate the variable cost (slope) 0 Data Table = Variable cost (slope) Month January ..... February......... March.... ...... Miles Driven 15,900 18.000 15,300 16,300 17.000 15,700 15,000 Van Operating costs $5,420 $5,460 $5,100 $5,290 $5,520 $5,150 $4,950 May June... Print Done Choose from any drop-down list and then click Check Answer.

Answer 1

Ans.	High low method : In this method, we assumed that the highest activity (miles driven) leads to
	highest cost and lowest activity leads to lowest cost.
	So, February month has the highest data and July month has the lowest data.
	*First, we need to calculate the variable rate then we will be able to compute the fixed cost.
	Variable cost per unit = (Highest cost - Lowest cost) / (Highest miles driven - Lowest miles driven)
	($5,460 - $4,950) / (18,000 - 15,000)
	$510 / 3,000
	$0.17 per unit
Ans.	Now, we can calculate the fixed overhead cost by using either highest activity or lowest activity.
	*Calculation of fixed overhead cost using Highest miles driven :
	Fixed van operating cost = Highest cost - (Highest miles driven * Variable cost per unit)
	$5,460 - (18,000 * $0.17)
	$5,460 - $3,060
	$2,400
Ans.	Total Van operating cost = Fixed cost + (Variable cost per miles driven * Miles)
	$2,400 + ($0.17 * 16,500)
	$2,400 + $2,805
	$5,205