Question

For the current year, Furniture Company incurred the following:

Month	Delivery Costs	# of Deliveries
April	$60,200	250
May	57,500	275
June	80,800	400
July	45,000	150
August	65,000	200
September	55,000	100
October	62,000	350
November	50,550	125
December	45,850	175

Using the high-low method to analyze mixed costs and the data above, what is the estimate of Delivery Costs at 450 deliveries? Round calculations to two decimals.

Answer 1

Answer- The estimate of Delivery Costs at 450 deliveries is =$85100.

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 = 400 deliveries; y₂ = $80800
at lowest activity: x₁ = 100 deliveries; y₁ =$55000

1)-Variable Cost per delivery = ($80800-$55000) /(400 deliveries-100 deliveries)  

= $25800/300 deliveries

= $86 per delivery
Total Fixed Cost = $80800 − ($400 deliveries*$86 per delivery)

= $80800 – $34400

= $46400

Delivery Costs at 450 deliveries = Variable costs+ Fixed costs

= ($86 per delivery*450 deliveries)+$46400

= $38700+$46400

= $85100