Question

EX 21-8 High-low method for service company

Patriot Railroad decided to use the high-low method and operating data from the past six months to estimate the fixed and variable components of transportation costs. The activity base used by Patriot Railroad is a measure of railroad operating activity, termed “gross-ton miles,” which is the total number of tons multiplied by the miles moved.

Transportation Costs                           Gross-Ton Miles

January                        $1,666,000                                          539,000

February                      $1,460,200                                          607,600

March                          $1,255,000                                          475,000

April                            $1,421,000                                          588,000

May                             $1,288,000                                          504,000

June                             $1,750,000                                          750,000

Determine the variable cost per gross-ton-mile and the total fixed cost.

Answer 1

v

High-Low Method:
			Cost	Tons Miles
High Activity-June			1750000	750000
Low Activity-march			1255000	475000
Change			495000	275000
Variable cost per Gross ton-mile = Change in Transpotation cost / Change in Gross Ton miles
			495000 /275000 = 1.80 per gross ton mile
Fixed cost:
Total cost under High activity of 750000 tons miles					1750000
Less: Variable cost under high activity					1350000
	(750000 tons miles @ 1.80)
Fixed cost					400000