Question

Cartour is a car centre specializing in 15 minute oil changes. The company has two service people, which limits its capacity to 3,600 oil changes per month. The following information was collected over the past six months: Month January February March April May June Number of oil changes 3,400 2,700 3,000 2,900 3,500 3.100 Operating expenses 36,800 32,100 33,300 32,900 37,700 34 100 Required: 1. Use the high-lo method to determine the variable and fixed cost components of the company's operating costs. 2. What are the projected operating costs if the company does 3,600 oil changes?

Answer 1

According to high - low method

Variable cost per unit = (Highest activity cost - Lowest activity cost) $\div$ (Highest activity units - Lowest activity units)

Highest activity units = 3500 units

Highest activity cost = 37700 (cost at 3500 units)

Lowest activity units = 2700 units

Lowest activity cost = 32100 (cost at 2700 units)

Variable cost per unit = (37700 - 32100) $\div$ (3500 - 2700)

= 5600 $\div$ 800

1. Variable cost = 7 per unit

Fixed cost = Total cost - (Variable cost per unit $\times$ Number of units)

Let's appply this formula to a random number of oil changes say, 3500 units to find out the fixed cost

Fixed cost = 37700 - (7 $\times$ 3500)

37700 is the total cost at 3500 units level

= 37700 - 24500

Fixed cost = 13200

2. Projected operating cost at 3600 units = (7 $\times$ 3600) + 37700

= 25200 + 37700

= 62900