Question

Kate Chen, owner of Flowers 4 You, operates a local chain of foral shops. Each shop has its own delivery read of charging a fost delivery fee Che wants to set the delivery fee based on the distance driven to deliver the flowers. Chen wars to or the food and variable portions of her van opening that she has a better idea how delivery distance atect those costs. She has a flowing data from the past seven months (Click the loon to view the data) Use the high-low method to determine Flowers 4 You's cost equation for an operating costs. Use your results to predict van operating costs a volume of 17,000 miles Lars begin by determining the formula that is used to calore the variable cost slope)

Answer 1

1. Average cost per unit = 21.43 when producing 1100 units. So total cost of producing 1100 units => 1100*21.43 => 23573 $.

2. Total Cost = Fixed cost + Variable cost

ie., 23573 = 10373 + VC. SO VC => 13200 $.

Variable cost per unit = 13200/1100 = $ 12 per unit.

3. Let Y be the Total cost and X be units sold.

So equation is Y = 10373 + 12X

4. Under Average cost method, Total Cost = 21.43*1300 = 27859

5. Under Cost Equation method, Y = 10373+12(1300) = 25973

6. Difference => 27589 - 25973 => 1886. Cost equation is more appropriate as fixed costs are constant regardless of the level of production. Hence average cost method will not yield correct cost figures most of the times.