Question

The manager of the main laboratory facility at CitiFit Center is interested in being able to predict the overhead costs each month for the lab. The manager believes that total overhead varies with the number of lab tests that some costs remain the same each month regardless of the number of lab tests performed. The lab manager collected the following data for the first seven months of the year EEB (Click the icon to view the data) performed but Use the high-low method to determine the laboratory's cost equation for total laboratory overhead. Use your results to predict total laboratory overhead if 3,100 lab tests are performed next month.

Answer 1

Under the high low method, first we will determine the variable cost per unit / per lab test. For determining the variable cost, we will take the highest level of activity and the lowest level of activity.

Highest level of activity or highest no. of lab tests were in the month of May 4200 tests

Lowest level of activity or lowest no. of lab tests were in the month of June 2200 tests

Now, total cost at highest no. of lab test in May is $27000

and, total cost at lowest no. of lab test in June is $18000

Now, Variable cost per unit = Total cost at highest level - Total cost at lowest level / No. of lab test at highest level - no. of lab tests at lowest level

Variable cost per unit = $27000 - $18000 / 4200 - 2200

Variable cost per unit or per lab test = $9000 / 2000 = $4.5

Next we will calculate the fixed cost:

No. of lab test at highest level = 4200

Variable cost at highest level = $4.5 * 4200 = $18900

Total cost at highest level of activity or highest no. of lab test (given) = $27000

Total cost = Variable cost + Fixed cost

$27000 = $18900 + Fixed cost

Fixed cost = $8100

Now, the equation is:

Y = $4.5x + $8100

where Y is the total overhead cost, x is the no. of lab tests and $8100 is the fixed cost.

If 3100 lab tests are performed next month, then total laboratory overhead cost is:

Y = ($4.5 * 3100) + $8100

Y= $13950 + $8100

Y= $22050