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# Analyzing costs into variable and fixed elements.

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1. Which method of analyzing mixed cost can be used to estimate an equation for the mixed cost?

2. The high-low method is used with which types of costs.

3. Eddy Corporation has provided the following production and total cost data for two levels of monthly production volume. The company produces a single product.

Production volume 6,000 units 7,000 units
Direct materials \$582,600 \$679,700
Direct labor \$136,200 \$158,900

The best estimate of the total variable manufacturing cost per unit is:

4. Given the cost formula Y = \$12,500 + \$5.00X, total cost for an activity level of 4,000 units would be.

5. The following data relate to two levels of activity at an out-patient clinic in a hospital:

Number of patient-visits 4,500 5,750

The best estimate of the variable general overhead cost per patient-visit is closest to

6. Use the following to answer questions 15 & 16:

Golden Dragon Restaurant would like to estimate the variable and fixed components of its utilities costs and has compiled the following data for the last five months of operations.

Month Meals served Utilities costs
December 550 \$401.00
January 300 \$360.00
February 250 \$347.50
March 400 \$385.50
April 600 \$414.00

15. Using the high-low method of analysis, the estimated variable utilities cost per meal served is:

16. Using the high-low method of analysis, the estimated monthly fixed component of utility cost is:

#### Solution Summary

The solution provides a detailed guideline on how to separate costs into variable and fixed costs.

Furthermore, the solution also provides guidelines on using the derived high-low equation for prediction.

\$2.19

## Firms output input costs are determined.

A firm currently uses 50,000 workers to produce 200,000 units of output per day. The daily wage per worker is \$80, and the price of the firm's output is \$25. The cost of other variable inputs is \$400,000 per day. Although you do not know the firm's fixed cost, you know that it is high enough that the firm's total costs exceed its total revenue.

Assume that total fixed cost equals \$1,000,000. Calculate the values for the following four formulas:

Total Variable Cost = (Number of Workers * Worker's Daily Wage) + Other Variable Costs
Average Variable Cost = Total Variable Cost / Units of Output per Day
Average Total Cost = (Total Variable Cost +Total Fixed Cost) / Units of Output per Day
Worker Productivity = Units of Output per Day / Number of Workers

Then, assume that total fixed cost equals \$3,000,000, and recalculate the values of the four variables listed above. For both cases, calculate the firm's profit or loss.

For both sets of calculations, compare the firm's output price and the calculated average variable cost and average total cost. Should the firm shutdown immediately when the total fixed cost equals \$1,000,000? Should the firm shut down immediately when the total fixed cost equals \$3,000,000?

For one of the cases, if the firm can operate at a loss in the short-run, how many employees need to be laid off in order for the company to break even? To calculate the number of workers to be laid off, divide the loss for the two situations by the daily wage per worker. Given a lower number of employees now working at the company, what is the change in worker productivity? Is the change in worker too large, and the firm should shut down immediately? Or in your opinion, can the workers increase their productivity, assuming that the units of output per day remain fixed at 200,000 units, so that the firm operates at a break even state?

For both sets of calculations, compare the firm's output price and the calculated average variable cost and average total cost. Should the firm shutdown immediately when the total fixed cost equals \$1,000,000? Should the firm shut down immediately when the total fixed cost equals \$3,000,000?

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