Question

Myrick Woodcraft Company (MWC) manufactures “antique” wooden cabinets to house modern televisions. MWC began operations in January of last year. Sidney Myrick, the owner, asks for your assistance. He believes that he needs to better understand the cost of the cabinets for pricing purposes. You have collected the following data concerning actual production over the past year:

Month	Number of Cabinets Produced		Total Cost
January	800		$	21,000
February	3,600			32,500
March	1,960			29,500
April	600			18,600
May	1,600			29,000
June	1,300			27,000
July	1,100			25,600
August	1,800			31,000
September	2,280			32,000
October	2,940			31,500
November	3,280			32,000
December	400			16,500

Required

1. To understand the department’s cost behavior, you decide to plot the points on graph paper and sketch a total cost line.

1. (1) Enter the number of units and their costs in increasing order.
   

2. Using the high-low method, compute the total cost equation for the preceding data.

1. (1) Compute the variable cost per unit.

2. (2) Compute total fixed costs.

3. (4) Calculate the total cost assuming 2,000 cabinets are made.

Myrick Woodcraft Company (MWC) manufactures “antique” wooden cabinets to house modern televisions. MWC began operations in January of last year. Sidney Myrick, the owner, asks for your assistance. He believes that he needs to better understand the cost of the cabinets for pricing purposes. You have collected the following data concerning actual production over the past year:

Month	Number of Cabinets Produced		Total Cost
January	800		$	21,000
February	3,600			32,500
March	1,960			29,500
April	600			18,600
May	1,600			29,000
June	1,300			27,000
July	1,100			25,600
August	1,800			31,000
September	2,280			32,000
October	2,940			31,500
November	3,280			32,000
December	400			16,500

Required

1. To understand the department’s cost behavior, you decide to plot the points on graph paper and sketch a total cost line.

1. (1) Enter the number of units and their costs in increasing order.
   

2. Using the high-low method, compute the total cost equation for the preceding data.

1. (1) Compute the variable cost per unit.

2. (2) Compute total fixed costs.

3. (4) Calculate the total cost assuming 2,000 cabinets are made.

Answer 1

Solution :

1. Statement showing number of units and their costs in an increasing order

Number of Cabinets Produced	Total Cost ( $ )
400	16500
600	18600
800	21000
1100	25600
1300	27000
1600	29000
1800	31000
1960	29500
2280	32000
2940	31500
3280	32000
3600	32500

1.

Computation of the total cost equation applying High-Low Method, (Refer Working Note 1 & 2)

Total Cost Equation = Variable Cost + Fixed Cost

= Number of units produced * 5 + 14500

Working Note 1:

Variable cost per unit = (Highest Activity Cost - Lowest Activity Cost) / (Highest Activity Units - Lowest Activity Units)

= (32500 - 16500) / (3600 - 400)

= 16000 / 3200

= $5 per unit

Working Note 2:

Fixed Cost = Highest Activity Cost - (Variable Cost per unit * Highest Activity Units)

= 32500 - (5*3600)

= $14,500

4) Calculation of the total cost assuming 2,000 cabinets are made

Total Cost (2,000 cabinets) = Total Variable cost + Total Fixed Cost)

= 2000*5 + 14500

= 10000+14500

= $24,500