High-Low method of Cost estimation
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Problem 1.
Rio Bus Tours has incurred the following bus maintenance costs during the recenttourist season.
(The real is Brazil's national monetary unit. On the day this exercise was written, the real was
equivalent in .4378 US dollar.)
Month Miles traveled by the us Cost
Nov 8,500 11,400 real
Dec 10,600 11,600
Jan 12,700 11,700
Feb 15,000 12,000
Mar 20,000 12,500
Apr 8,000 11,000
1. Use the high-low method to estimate the variable cost er tour miles traveled and fixed cost per month.
2. Develop a formula to express the cost behavior exhibited by the compny's maintenance cost.
3. Predict the level of maintenance cost that woud be ncurred during a month when 22,000
tour miles are driven (real numbers)
4. Construct a Excel spreadsheet to solve all the preceding requirements. Show how the solution will
change if the following information changes: in Marh there were 21,000 miles traveled and the cost was
12,430 real.
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Solution Summary
The solution explains the use of high low method in cost estimation
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1. Use the high-low method to estimate the variable cost for tour miles traveled and fixed cost per month.
In the high-low method we take the highest and the lowest values to separate the fixed and variable costs. The highest cost is 12,500 and highest miles are 20,000. The lowest cost is 11,000 and the lowest miles are 8,000. Next we take the difference. The difference of cost = 12,500-11,000=1,500 and the ...
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