Question

Using High-Low to Calculate Fixed Cost, Calculate the Variable Rate, and Construct a Cost Function

Pizza Vesuvio makes specialty pizzas. Data for the past 8 months were collected:

Month   Labor Cost($)   Employee Hours
    January      9,290         310
    February      6,800         360
    March      7,331         380
    April      7,940         290
    May      9,587         340
    June      8,290         260
    July      10,378         430
    August      7,300         240
Pizza Vesuvio's controller wants to calculate the fixed and variable costs associated with labor used in the restaurant.

In your calculations, round the variable rate per employee hour to the nearest cent. If required, round your final answers to the nearest cent.

Required:

1. Using the high-low method, calculate the fixed cost of labor.
$

2. Using the high-low method, calculate the variable rate.
$

per employee hour

3. Using the high-low method, construct the cost formula for total labor cost.

Total labor cost = $

+ ($

× Employee hours)

Answer 1

Estimate the costs with High-Low Method Month Employee Hours Labor Cost High level of Activity July 430 10378 low level of Activity August 240 7300 Difference 190 3078 Answers Fixed Cost (10378-(430*16.20) 3412 Per month Varaible cost Per unit (3078/190) 16.20 Per Emploess Hour Total Labor Cost = $3,415+($ 16.20 * Employee Hours) Variable Cost = Differece in cost / Difference in Hours Fixed cost = Cost-(hours *Variable Cost) Cost Equation = Fixed Cost +Hours * Varaible cost Per hour