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 1,550 units. The following are the results of that analysis:

Cost Item	Total Cost	Fixed Cost	Variable Cost
Direct materials	$6,665	$0	$6,665
Direct labor	$7,750	$0	$7,750
Factory overhead	$8,150	$3,190	$4,960
Selling expenses	$5,310	$3,140	$2,170
Administrative expenses	$4,600	$4,600	$0
Total expenses	$32,475	$10,930	$21,545

For the high-low method, she developed the cost function using the data from June above and data from August, when production was 2,450 units and total costs were $45,885.

After developing the two cost functions, the accountant used them to make predictions for the month of October, when production was expected to be 2,400 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 total variable costs for October?   

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 variable costs per unit for October?

Answer 1

Part A Fixed Cost = $10,944

Variable Cost = $33,360

Part A	Per Unit( Variable cost/1550 units)	Total Amount(2,400 units)
Cost Item
Variable Cost
Direct Material	$                        4.30	$     10,320.00
Direct Labour	$                        5.00	$     12,000.00
Factory OH	$                        3.20	$        7,680.00
Selling Expense	$                        1.40	$        3,360.00
Total Variable cost	$                      13.90	$     33,360.00
Fixed Cost
Factory OH		$        3,190.00
Selling Expense		$        3,140.00
Administrative Expense		$        4,600.00
Total Fixed Cost		$     10,930.00
Total Cost		$ 44,290.00

Part B

High low Method = (Value of High- Value of Low)/(high units- low units)

Fixed Cost= $9,380 and Variable cost= $35,760

Part B	Units	Total Cost
Cost For August	$                2,450.00	$     45,885.00
Cost for June	$                1,550.00	$     32,475.00
Difference	$                    900.00	$     13,410.00
Variable Cost per unit		$             14.90	(13410/900)
Cost for August	$                2,450.00	$     45,885.00
Less: Variable cost		$     36,505.00	(2450*14.9)
Fixed Cost for October		$       9,380.00
Variable Cost for October	$                2,400.00	$    35,760.00	(2,400*14.9)