Question

Martha's Vineyard Marine Supply is a wholesaler for a large variety of boating and fishing equipment. The company's controller, Mathew Knight, has recently completed a cost study of the firm's material handling department in which he used work measurement to quantify the department's activity. The control factor unit used in the work-measurement study was hundreds of pounds of equipment unloaded or loaded at the company's loading dock. Knight compiled the following data. Units of Activity (hundreds of pounds of equipment loaded or unloaded) Month 2,300 January February March April May June July August September October November December 2,100 2,000 3,500 2,700 2,900 3,300 3,100 1,900 2,200 2,500 2,700 Material-Handling Department Costs $19,570 19,210 18,730 22,500 20,340 21,300 22,570 20,760 17,700 19, 290 19,880 20,640 Required: 5. Estimate the material handling department's cost behavior using the high-low method. Use an equation to express the results of this estimation method. (Round coefficient of X to 2 decimal places.) Material handling cost per month =

Answer 1

Solution- In high low Method first we have to find out highest and lowest activity cost and unit.

Here, Highest Activity Cost = $ 22,500( April)

Lowest Activity Cost=$17,700(September)

Highest Activity Unit = 3500 ( April)

Lowest Activity Unit = 1900(September)

Now ,put these values into the following formulas.

Formula to find variable cost-

Variable cost per unit = Highest Activity Cost - Lowest Activity Cost / Highest Activity Unit - Lowest Activity Unit

Variable Cost per unit = 22,500 - 17,700 / 3,500 - 1,900

= 4,800 / 1,600

= $ 3

Formula to find fixed cost-

(Fixed cost using high Activity cost )

Fixed Cost = Highest Activity Cost - ( Variable Cost per unit * Highest Unit)

Fixed Cost = 22,500 - (3* 3500)

= 22,500 - 10,500

= $ 12,000

(Fixed cost using lowest activity cost)

Fixed Cost = Lowest Activity Cost - ( Variable Cost per unit * Lowest Unit )

​​​​​​​Fixed Cost = 17,700 - (3* 1900)

= 17,700 - 5,700

= $ 12,000

​​​​​​​( either fixed cost can be used)

Required equation-

So, Equation = Fixed Cost + Variable Cost per unit * X

Here, X is hundreds of pounds of equipments