Question

To estimate the parameters of this cost function, the accountant first studied the behavior of last month's costs, when the company spent 318 service hours repairing 45 computer systems. Here are the results of her analysis:

Cost Item	Fixed Cost	Variable Cost
Utilities	$229	$149
Office rent	$3,819	$0
Administration	$3,249	$165
Supplies	$0	$3,437
Training	$350	$308
Total	$7,647	$4,059

Concerned that last month may not have been a typical month and her breakdown of fixed and variable costs not completely correct, the accountant decided to use the high-low method to create another cost function. She gathered individual cost and service hour data from the last six months; the following were for the two months when costs and service hours were the lowest and the highest:

Cost Item	low month	high month
Utilities	$233	$315
Office rent	$2,982	$2,982
Administration	$3,121	$3,515
Supplies	$1,518	$3,519
Training	$601	$726
Total	$8,455	$11,057
Service hours	244	569
Customers	30	70

Next month, Charlene expects the company to spend 400 hours solving clients' computer system problems.

REQUIRED [ROUND ALL PER-UNIT COSTS TO TWO DECIMAL PLACES AND TOTAL COSTS TO THE NEAREST DOLLAR.]

Part A (6 tries; 5 points)
What is the accountant's estimate of total "overhead" next month if she uses the cost function based on her analysis of last month's cost data?

Part B (6 tries; 5 points)
What is the accountant's estimate of total "overhead" next month if she uses the cost function based on the high-low method?

Answer 1

Answer 1

$ 12,751

Calculations:

Total cost = Fixed cost +variable cost

= $ 7647+ ( $ 4059/ 318* 400)

= $ 12,751

Answer 2

$ 9705

Calculations:

	Lowest range	Highest range
Cost	$          8,455	$         11,057
Hours	244	569

As per High Low Method,

Variable cost per hour = Change in costs / change in hours

Variable cost per hour = ($11,057-$8,455)/(569-244)

Variable cost per hour = $ 2,602/325

Variable cost per hour = $ 8.00

Fixed Cost = Total Cost - Variable Cost

Fixed Cost = Total Cost - (Variable Cost per hour * hours)

Fixed Cost = $11057-($ 8.00*569)

Fixed Cost = $ 6505

Total cost = Fixed cost +variable cost

= $ 6505+ ( $ 8.00 * 400)

= $ 9705

In case of any doubt, please comment.