Question

Tony Pena, owner and manager of Tony’s Pizza. This is a small store that delivers 12-inch pepperoni pizzas for phoned-in orders. Each pizza sells for $10. Tony has the following data concerning the prior 12 months of operations:
Tony Pena, owner and manager of Tony's Pizza. This is a small store that delivers 12-inch pepperoni pizzas for phoned-in orders. Each pizza sells for $10. Tony has the following data concerning the prior 12 months of operations: Total Operating Costs $40,232 40,544 October Pizzas Prepared 5,513 6,067 6,690 7,000 2,586 November December 42,897 January February March April 3,000 May 3,492 3,718 4,010 44,564 30,549 34,536 36,216 36,291 37,373 37,655 38,423 39,099 $458,379 June 4,366 4,735 July August September Total 4,806 55,983 Required 1. Using this monthly data:

Answer 1

Answer-1)- Cost Equation= y = $22304 + $3.18x

2)-Variable cost per unit =$3.18 per unit

3)- Fixed costs = $22304.

Explanation:-

High-Low Method:-

Variable Cost per Unit

Variable cost per unit (b) is calculated using the following formula:

Variable cost per unit = (Y2-Y1)/(X2-X1)

Where,
y2 is the total cost at highest level of activity;
y1 is the total cost at lowest level of activity;
x2 are the number of units/miles/ labor ,machine hours etc. at highest level of activity; and
x1 are the number of units/miles/ labor, machine hours etc. at lowest level of activity

The variable cost per unit is equal to the slope of the cost volume line (i.e. change in total cost ÷ change in number of machine hours).

Total Fixed Cost

Total fixed cost (a) is calculated by subtracting total variable cost from total cost, thus:

Total Fixed Cost = (y2 – b)*x2 = (y1 – b*x1)

We have,
at highest activity: x₂ = 7000 pizzas prepared; y₂ = $44564
at lowest activity: x₁ = 2586 pizzas prepared ; y₁ = $30549

Variable Cost per unit = ($44564− $30549) /(7000 −2586)  

= $14015/4414 units = $3.18 per unit
Total Fixed Cost = $44564 − ($3.18 per unit*7000 units)

= $44564 – $22260

=$22304