Archer Company is a wholesaler of custom-built air-conditioning units for commercial buildings. It gathered the following monthly data relating to units shipped and total shipping expense:
| Month | Units Shipped | Total Shipping Expense | |||
| January | 3 | $ | 1,500 | ||
| February | 6 | $ | 2,000 | ||
| March | 4 | $ | 1,400 | ||
| April | 5 | $ | 1,700 | ||
| May | 7 | $ | 2,000 | ||
| June | 8 | $ | 3,000 | ||
| July | 2 | $ | 900 | ||
2. Using the high-low method, estimate the cost formula for shipping expense.
Explanation
2.
The high-low estimates and cost formula are computed as follows:
| Units Shipped | Shipping Expense | |||
| High activity level (June) | 8 | $ | 3,000 | |
| Low activity level (July) | 2 | 900 | ||
| Change | 6 | $ | 2,100 | |
Variable cost element:
| Change in expense | = | $2,100 | = | $350 per unit |
| Change in activity | 6 units |
Fixed cost element:
| Shipping expense at high activity level | $ | 3,000 |
| Less variable cost element ($350 per unit × 8 units) | 2,800 | |
| Total fixed cost | $ | 200 |
The cost formula is $200 per month plus $350 per unit shipped or
Y = $200 + $350X,
where X is the number of units shipped.
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