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