Question

Using High-Low to Calculate Fixed Cost, Calculate the Variable Rate, and Construct a Cost Function Pizza Vesuvio makes specialty pizzas. Data for the past eight months were collected: Month Labor Cost($) Employee Hours January 5,896 260 February 8,623 390 March 9,286 420 April 6,854 310 May 7,960 360 June 6,412 290 July 7,750 440 August 7,517 340 Pizza Vesuvio's controller wants to calculate the fixed and variable costs associated with labor used in the restaurant In your calculations, round the variable rate per employee hour to the nefirest cent. If required, round your final answers to the nearest cent. Required: 1. Using the high-low method, calculate the fixed cost of labor. 2. Using the high-low method, calculate the variable rate. per employee hour 3. Using the high-low method, construct the cost formula for total labor cost. Total labor costs + (S X Employee hours)

Answer 1

Answer

a) Variable Rate per Hour = Highest Activity Labour Cost - Lowest Acitvity Labour Cost

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Highest Activity Rate - Lowest Activity Rate

= $ 9286 - $ 5896

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420-260

= $ 3390

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160

= $ 21.19 per Hour

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b) Fixed Cost Labor

Total Variable Cost = ( Variable cost per rate* Hour ) + Total Fixed Cost

$ 9286 = ( 21.19* 420) +Total Fixed Cost

$ 9286 = $ 8900 (Rounded) + Total Fixed Labor Cost

Total Fixed Labor Cost = $ 9286- 8900

= $ 386

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3. Cost formula for total labor cost

Total Labor Cost = Total Fixed labor Cost + ( Variable Cosr per rate * Hours)

= $ 386+(21.19*420)

= $ 386+$8900

= $ 9286

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Answer Reprduced

1 Fixed Cost of Labor = $ 386

2. Variable Rate = $ 21.19 per Hour

3. Cost formula for total labor cost = $ 386+(21.19*420)