Question

The manager of the main laboratory facility at MetroFit Center is interested in being able to predict the overhead costs each month for the lab. The manager believes that total overhead varies with the number of lab tests performed but that some costs remain the same each month regardless of the number of lab tests performed. The lab manager collected the following data for the first seven months of the year. B (Click the icon to view the data.) Use the high-low method to determine the laboratory's cost equation for total laboratory overhead. Use your results to predict total laboratory overhead if 2,900 lab tests are performed next month. Let's begin by determining the formula that is used to calculate the variable cost (slope). 1 Data Table Change in cost Change in volume = Variable cost (slope) Now determine the formula that is used to calculate the fixed cost component. Number of Lab Tests Total operating cost - Total variable cost = Fixed cost Month Performed 3,000 Use the high-low method to determine MetroFit's operating cost equation. (Round the var y = $ .12 x + $ 13532 January ........ February......... March April 2,850 3,400 3,700 3,900 1,900 2,050 Total Laboratory Overhead Costs $21,900 $20,600 $28,900 $31,000 $28,000 $20,200 $14,000 May............. June............ July............. Print Done

Answer 1

Change in cost/Change in volume = Variable cost (slope)

= (Highest activity cost - Lowest activity cost)/(Highest activity - Lowest activity)

= (28,000-20,200)/(3,900-1,900)

= 7,800/2,000

= $3.9 per lab test

Total operating cost -Total variable cost = Fixed cost

Highest activity cost - Highest activity x Variable cost per lab test

28,000 - 3,900 x 3.9

28,000-15,210

$12,790 = Fixed cost

Operating equation

y = $3.9x + $12,790

Laboratory cost,If total laboratory overhead 2,900 lab test are performed = Variable cost per test x Activity +Fixed cost

= 3.9 x 2,900 +12,790

= $24,100

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