Question

Sherri's Tan-O-Rama is a local tanning salon. The following information reflects its number of appointments and total costs for the first half of the year: Month January February March April May June Number of Appointments 300 375 450 250 325 275 Total Cost $6,050 7,000 6,400 5,600 5,800 5,350 Using the high-low method, calculate the total fixed cost per month and the variable cost per tanning appointment. (Round your "Variable Cost per Unit" answer to 2 decimal places and "Fixed Cost" answer to the nearest dollar amount.) Variable Cost per Unit Fixed Cost

Answer 1

Answer:-1)- Variable Cost per unit = $6 per unit.

Total Fixed Cost =$3700.

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 = 450 appointments; y2 = $6400
at lowest activity: x1 = 275 appointments; y1 = $5350

1)-Variable Cost per unit = ($6400-$5350) /(450 units −275 units)  

= $1050/175 units

= $6 per unit
Total Fixed Cost = $6400 − ($6 per unit*450 units)

= $6400 – $2700

= $3700