Question

Caiman Distribution Partners is the Brazilian distribution company of a U.S. consumer products firm. Inflation in Brazil has made bidding and budgeting difficult for marketing managers trying to penetrate some of the country's rural regions. The company expects to distribute 450,000 cases of products in Brazil next month. The controller has classified operating costs (excluding costs of the distributed product) as follows.

Account	Operating Cost			Behavior
Supplies	$	562,000		All variable
Supervision		202,000		$	145,000	Fixed
Truck expense		1,260,000		$	209,000	Fixed
Building leases		874,000		$	550,000	Fixed
Utilities		205,000		$	120,000	Fixed
Warehouse labor		872,000		$	131,000	Fixed
Equipment leases		753,000		$	599,000	Fixed
Data processing equipment		933,000		All fixed
Other		854,000		$	408,000	Fixed
Total	$	6,515,000

Although overhead costs were related to revenues throughout the company, the experience in Brazil suggested to the managers that they should incorporate information from a published index of Brazilian prices in the distribution sector to forecast overhead in a manner more likely to capture the economics of the business.

Following instructions from the corporate offices, the controller's office in Brazil collected the following information for monthly operations from last year.

Month	Cases	Price Index	Operating Costs
1	322,000	112	$5,699,145
2	353,000	111	5,806,644
3	323,000	111	5,849,911
4	376,000	113	5,927,623
5	364,000	125	5,939,141
6	372,000	129	6,043,370
7	380,000	124	5,918,501
8	428,000	128	6,133,874
9	378,000	125	6,126,136
10	420,000	130	6,186,631
11	420,000	139	6,208,805
12	429,000	141	6,362,261

These data are considered representative for both past and future operations in Brazil.

b. Use the high-low method to compute an estimate of operating costs assuming that 450,000 cases will be shipped next month. (Round variable cost to 5 decimal places. Round intermediate calculations and final answer to nearest whole dollar amount.)

Answer 1

Answer:

The Operating cost for 450,000 cases is $6,492,402.65420 (rounded to 5 decimals)

Step-By-Step Explanation:

Step 1: Calculation of variable cost

Using the high-low method,

The variable cost per unit = (highest activity cost - Lowest activity cost) / (highest Activity units - Lowest activity units)

The variable cost per unit = ($6,362,261- $5,699,145) / (429,000 -322,000)

The variable cost per unit = $6,63,116 / 107,000

The variable cost per unit = $6.19734 per unit

Step 2: Calculation of Fixed cost (constant)

Linear equation is Y= a + bX

Therefore,

using the data of lowest activity level, we get,

$5,699,145 = a + 322,000 × $6.19734

a = $5,699,145 - $1,995,545.345794

a (constant) = $3,703,599.65420

.

Step 3: Calculation of operating costs for 450,000 cases

Linear equation is Y= a + bX

Therefore,

Cost = $3,703,599.65420 + (450,000 × $6.19734)

= $3,703,599.65420 + $27,88,803

= $6,492,402.65420

Hence, The Operating cost for 450,000 cases is $6,492,402.65420 (rounded to 5 decimals)