Question

Dohini Manufacturing Company had the following 12 months of data on purchasing cost and number of purchase orders. Number of Purchasing Purchase Month Cost Orders January $18,860 370 February 18,040 330 March 19,250 370 April 18,050 410 May 19,345 400 June 19,500 450 July 19,670 460 August 20,920 570 September 19,430 440 October 20,020 500 November 18,800 470 December 19,340 480 Required: 1. Determine the high point and the low point.

Answer 1

1.

Month with high number of purchase orders = August

Month with low number of purchase orders = February

2.

Variable rate = (Cost at highest purchase orders - Cost at lowest purchase orders) / (Higest orders - Lowest Orders)

= ($20,920 - $18,040) / (570 - 330)

= $2,880 / 240

= $12

3.

Fixed cost at high purchase order = Total cost - Variable cost

= $20,920 - (570 * $12)

= $20,920 - $6,840

= $14,080

Fixed cost = $14,080

4.

Total purchasing cost = Fixed cost + (Variable cost per unit * Purchase orders)

Total purchasing cost = $14,080 + ($12 * Purchase orders)

5.

Total purchasing cost = $14,080 + ($12 * Purchase orders)

= $14,080 + ($12 * 420)

= $14,080 + $5,040

= $19,120

6.

Total purchasing cost for the year = 12 * Fixed cost + (Variable cost per unit * Purchase orders)

= 12 * $14,080 + ($12 * 5,350)

= $168,960 + $64,200

= $233,160

Total fixed purchasing cost = $168,960

It doesn't equal to the fixed cost calcuated in requirement 3 because the cost calculated in requirement 3 is for 1 month, but we have to calculate the cost of whole year which becomes 12 times the cost of 1 month.