Question

23. Felix &Co., reports the following information about its unit sales and cost of sales. a. Draw an estimated line of cost behavior using a scatter diagram and compute fixed costs and variable cost per unit sold. b. Then use the high-low method to estimate the fixed and variable components of cost of sales. Period ovou Awn Unit sales 0 400 800 1,200 1,600 2,000 2,400 2,800 3,200 3,600 Cost of sales $2,500 3,100 3,700 4,300 4,900 5,500 6,100 6.700 7,300 7,900

Answer 1

(a): Here the x variables are the unit sales and y variables are the cost of sales. The graph/chart is shown below:

Cost of sales (y) 9000 8000 7000 6000 5000 4000 3000 2000 1000 Cost of sales (y) 0 1000 2000 3000 4000

Thus we can see that fixed cost = $2,500. This is the cost where the line meets the y axis (i.e. it is the intercept).

Now the equation of this fit is: y = mx+b. As already shown b = 2500. m = (y2-y1)/(x2-x1) = (6100-2500)/(2400-0)

= 1.5

Thus fixed cost = $2,500 and variable cost per unit = $1.5

(b): In the high low method the formula is: variable cost per unit = (highest activity cost - lowest activity cost)/(highest activity units - lowest activity units)

= (7900-2500)/(3600-0)

= $1.5 per unit

Fixed cost = highest activity cost - (variable cost per unit * highest activity units)

= 7900 - (1.5*3600)

= 2500

Thus fixed cost = $2,500 and variable cost per unit = $1.5