Question

Mears Production Company makes several products and sells them for an average price of $80. 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 1,500 units. The following are the results of that analysis: Cost Item Total Cost Fixed Cost Variable Cost Direct materials $5,850 50 $5,850 Direct labor $7,800 50 $7,800 Factory overhead $6,990 $3,090 $3,900 $5,560 $3,760 $1,800 Selling expenses Administrative expenses $4,350 $4,350 $0 Total expenses $30,550 $11,200 $19,350 For the high-low method, she developed the cost function using the data from June above and data from May, when production was 2,350 units and total costs were $42,648. After developing the two cost functions, the accountant used them to make predictions for the month of October, when production was expected to be 1,725 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 October? 2. Using account analysis, what was the accountant's estimate of variable costs per unit for October? Submit Answer Tries 0/5 Part B (5 tries; 5 points) 1. Using the high-low method, what was the accountant's estimate of total fixed costs for October? 2. Using the high-low method, what was the accountant's estimate of total variable costs for October?

Answer 1

Part A:

1) From the given table, Using Account Analysis, the Accountant's estimate of Total Fixed costs for October is  $11,200

2) Using Account Analysis, the Accountants estimate of variable cost per unit for october is

$19,350 / 1,500 = $12.9

Part B:

HIgh - Low Method:

The formula using Highest Low Method is as follows

2) Variable cost per unit = y2 - y1 / x2 - x1

where, y2 is the lotal cost at the highest level of activity

y1 is the lotal cost at the lowest level of activity

x2 is the number of units produced at the highest level of activiy

x1 is the number of units produced at the lowest level of activiy

Here, y2 = $42,648, y1 = $30,550, x2 = 2,350 , x1 = 1,500

Variable cost per unit = ($42,648 - $30,550) / (2,350 - 1,500

= $12,098 / 850

Variable cost per unit = $14.23

1) Formula to calculate Total fixed costs using High Low method is as follows

Fixed cost = Highest Activity cost - (Varibale Cost * Highest Activity Units)

= $42,648 - ($14.23 * 2,350)

= $42,648 - $33,447.42

Fixed cost = $9,200.58

(or)

Fixed cost = Lowest Activity cost - (Varibale Cost * Lowest Activity Units)

= $30,550 - ($14.23 * 1,500)

= $30,550 - $21,349.42

Fixed cost = $9,200.58

Note: The fixed cost amount varies depending upon the number of decimals you take for variable cost per unit while calculating the formula