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Calculations Using the High-Low Method

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1. High-Low Method; Scattergraph Analysis (LO2, LO3)

Zerbel Company, a wholesaler of large, custom-built air conditioning units for Commercial buildings, has noticed considerable fluctuation in its shipping expense from month to month, as shown below:

Month Units Total Shipping
Shipped Expense

January 4 $2,200
February 7 $3,100
March 5 $2,600
April 2 $1,500
May 3 $2,200
June 6 $3,000
July 8 $3,600

1. Using the high-low method, estimate the cost formula for shipping expense.
2. The president has no confidence in the high-low method and would like you to "check out" your results using the scattergraph method. Do the following:
a. Prepare a scattergraph, using the data given above. Plot cost on the vertical axis and activity on the horizontal axis. Fit a straight line to your plotted points using a ruler.
b. Using your scattergraph, estimate the approximate variable cost per unit shipped and the approximate fixed cost per month with the quick-and-dirty method.
3. What factors, other than the number of units shipped, are likely to affect the company's shipping expense? Explain.

2. Cost Behavior; High-Low Method (LO1, LO3)
Speedy Parcel Service operates a fleet of delivery trucks in a large metropolitan area. A careful study by the company's cost analyst has determined that if a truck is driven 120,000 miles during a year, the average operating cost is 11.6 cents per mile. If a truck is driven only 80,000 miles during a year, the average operating cost increases to 13.6 cents per mile.

Problem:

1. Using the high-low method, estimate the variable and fixed cost elements of the annual cost of truck operation.

2. Express the variable and fixed costs in the form y = a + bX.

3. If a truck were driven 100,000 miles during a year, what total cost would you expect to be incurred?

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Solution Summary

This solution provides detailed explanations for solving financial questions with the high-low method.

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Cost Formula Using the High Low Method

The controller of Chittenango Chain Company believes that the identification of the variable and fixed components of the firm's costs will enable the firm to make better planning and control decisions. Among the costs the controller is concerned about is the behavior of indirect-materials cost. She believes there is a correlation between machine hours and the amount of indirect materials used.
A member of the controller's staff has suggested that least-squares regression be used to determine the cost behavior of indirect materials. The regression equation shown below was developed from 40 pairs of observations.

S = $200 + $4H
Where S = Total monthly cost of indirect materials
H = Machine hours per month

2. Calculate the estimated cost of indirect materials if 900 machine hours are to be used during a month. (Omit the "$" sign in your response.)

4. The high and low activity levels during the past four years, as measured by machine hours, occurred during April and August, respectively. Data concerning machine hours and indirect-material usage follow.

April ; August
Machine hours 1,100 ; 800
Indirect supplies:
Beginning inventory $ 1,200 ; $ 950
Ending inventory 1,550 ; 2,900
Purchases 6,000 ; 6,100
Determine the cost of indirect materials used during April and August.

5. Use the high-low method to estimate the behavior of the company's indirect-material cost.

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