Question

Mears Production Company makes several products and sells them for an average price of $70. Mears' accountant is considering two different approaches to estimating the firm's total monthly cost function, 1) account analysis, and 2) high-low. In both cases, she used units of production as the independent variable. For the account analysis approach, she developed the cost function by analyzing each cost item in June, when production was 1,950 units. The following are the results of that analysis: Total Cost Fixed Cost $0 $0 Cost Item Direct materials Direct labor Factory overhead Selling expenses Administrative expenses Total expenses $7,410 $9,165 $9,475 $5,670 $3,200 $34,920 Variable Cost $7,410 $9,165 $6,435 $1,950 $0 $24,960 $3,040 $3,720 $3,200 $9,960 For the high-low method, she developed the cost function using the data from June above and data from August, when production was 2,300 units and total costs were $40,188. After developing the two cost functions, the accountant used them to make predictions for the month of December, when production was expected to be 2,000 units REQUIRED (ROUND UNIT COSTS TO THE NEAREST CENT AND TOTAL COSTS TO THE NEAREST DOLLAR) Part A (5 tries; 5 points) 1. Using account analysis, what was the accountant's estimate of total fixed costs for December? 2. Using account analysis, what was the accountant's estimate of total variable costs for December?

Answer 1

part A

1) $9960

using account analysis total fixed cost for december is $9960.the total fixed cost will not change for the change in units.

2) $25600

using account analysis variable cost for december=variable cost per unit*number of units produced in december

number of units produced in december is 2000 units

variable cost per unit=total variable cost/number of units

variable cost per unit=$24960/1950=$12.8 per unit

variable cost for december=$12.8*2000=$25600

part B

1) $5573

using high low method total fixed cost for december

variable cost per unit=(total cost of highest activity level-total cost of lowest activity level) / (highest activity level - lowest activity level)

total cost of highest activity level=$40188

total cost of lowest activity level=$34920

highest activity level=2300 units

lowest activity level=1950 units

variable cost per unit=($40188-$34920)/(2300-1950)=$15.05

note:the figure is rounded upto 2 decimal point

total cost=total variable cost+total fixed cost

on rearranging

total fixed cost=total cost - total variable cost

applying to the highest activity level

total fixed cost=$40188-($15.05*2300)=$5573

$5573 will be the total fixed cost for december using high low method.the total fixed cost will not change for the change in units.

2) $15.05

using high low method variable cost per unit for december

variable cost per unit=(total cost of highest activity level-total cost of lowest activity level) / (highest activity level - lowest activity level)

total cost of highest activity level=$40188

total cost of lowest activity level=$34920

highest activity level=2300 units

lowest activity level=1950 units

variable cost per unit=($40188-$34920)/(2300-1950)=$15.05

note:the figure is rounded upto 2 decimal point