Question

Problem 21-2A Scatter diagram and cost behavior estimation LO P1

Alden Co.'s monthly unit sales and total cost data for its operating activities of the past year follow. Management wants to use these data to predict future fixed and variable costs.

$$ \begin{array}{cccccc} \text { Month } & \text { Units Sold } & \text { Total Cost } & \text { Month } & \text { Units Sold } & \text { Total Cost } \\ 1 & 320,000 & \$ 157,500 & 7 & 360,000 & \$ 278,000 \\ 2 & 165,000 & 101,250 & 8 & 270,000 & 151,750 \\ 3 & 265,000 & 205,600 & 9 & 76,000 & 65,000 \\ 4 & 205,000 & 100,000 & 10 & 150,000 & 130,625 \\ 5 & 290,000 & 201,500 & 11 & 94,000 & 94,000 \\ 6 & 190,000 & 112,000 & 12 & 100,000 & 81,650 \end{array} $$

2. Estimate both the variable costs per unit and the total monthly fixed costs using the high-low method. (Do not round intermediate calculations.)

3. Predict future total costs when sales volume is (a) 390,000 units and (b) 430,000 units.

Answer 1

High Low method-Calculation of variable cost per unit
Change in cost	Cost at high point minus cost at low point	213000	Variable cost per unit	0.75
Change in volume	Volume at high point minus volume at low point	284000
High Low method-Calculation of fixed costs
Total cost at the high point		278000
Variable costs at the high point:
Volume at the high point	360000
Variable cost per unit	0.75
Total Variable costs at the high point		270000
Total fixed costs		8000
Total cost at the low point		65000
Variable costs at the low point:
Volume at the low point	76000
Variable cost per unit	0.75
Total Variable costs at the low point		57000
Total fixed costs		8000

3

	Predictions
Sales(units)	390000	430000
Variable costs	292500	322500
Fixed costs	8000	8000
Total costs	300500	330500
Workings:
	Predictions
Sales(units)	390000	430000
Variable costs	=390000*0.75	=430000*0.75