Question

Question 4. Fred's Golden Brown Pancake Restaurant features sourdough pancakes made from a strain of sourdough dating back to the Yukon gold rush. To plan for the future, Fred needs to figure out his cost behaviour patterns. He has the following information about his operating costs and the number of pancakes served: Month Number of Pancakes Total Operating costs July.... 4.200 $2.320 August.......... 4.500 September..... $2,340 $2,220 $2,300 $2,510 3.500 3,800 4,300 October November. December. ....... 3.900 $2.490 A. Use the high-low method to determine Fred's operating cost equation 3 points

Answer 1

A)

	Total operating cost	Number of pancakes
Highest activity	2340	4500
Lowest activity	2220	3500
Change in cost /number of pancakes	120	1000

Variable cost per pancake = Change in cost /change in number of pancakes

                                      = 120 /1000

                                      = .12 per unit

Highest activity
Total cost		2340
Less:Variable cost
Number of pancakes	4500
variable cost per pancake	.12
Total variable cost (4500*.12)		(540)
Fixed cost		1800
Lowest activity
Total cost		2220
Less:Variable cost
Number of pancakes	3500
variable cost per pancake	.12
Total variable cost (3500*.12)		(420)
Fixed cost		1800

Total cost(y) = 1800+ .12x   where X= number of pancakes

b)

Total operating cost = 1800 +(.12*4700)

                                = 1800+ 564

                                = 2364

c)No,Total operating cost cannot be predicted.

If number of pancakes served is 8000 which is outside the relevant range of 0 -5000 ,then total operating cost cannot be predicted as fixed cost remains constant only within a relevant range thus fixed cost will vary if number of pancakes served is outside the relevant range and so as total operating cost .