Question

Mears Production Company makes several products and sells them for an average price of $90. Mears' accountant is considering two different approaches to estimating the firm's total monthly cost function, 1) account analysis, and 2) high-low. In both cases, she used units of production as the independent variable. For the account analysis approach, she developed the cost function by analyzing each cost item in June, when production was 1,550 units. The following are the results of that analysis:

Cost Item	Total Cost	Fixed Cost	Variable Cost
Direct materials	$5,580	$0	$5,580
Direct labor	$7,285	$0	$7,285
Factory overhead	$7,145	$2,960	$4,185
Selling expenses	$5,585	$3,880	$1,705
Administrative expenses	$4,900	$4,900	$0
Total expenses	$30,495	$11,740	$18,755

For the high-low method, she developed the cost function using the data from June above and data from August, when production was 2,350 units and total costs were $41,263.

After developing the two cost functions, the accountant used them to make predictions for the month of December, when production was expected to be 1,725 units.

REQUIRED [ROUND UNIT COSTS TO THE NEAREST CENT AND TOTAL COSTS TO THE NEAREST DOLLAR.]

Part A (5 tries; 5 points)
1. Using account analysis, what was the accountant's estimate of total fixed costs for December?   

2. Using account analysis, what was the accountant's estimate of total variable costs for December? (This is the main one I need help with)

Part B (5 tries; 5 points)
1. Using the high-low method, what was the accountant's estimate of total fixed costs for December?   

2. Using the high-low method, what was the accountant's estimate of variable costs per unit for December?   

Answer 1

A)
1) Fixed Cost using Account Analysis
Total Fixed Cost will not change for the variation in production unit
Account Analysis in June Data = $11,740
2) Variable Cost Using Account Analysis
In account analysis Variable Cost per Unit will not change
So compute the variable cost per unit first to compute the variable cost of December
Variable Cost Per Unit
Direct Material	= 5,580/1550
	3.6 Per Unit
Direct Labour	= 7,285/1550
	4.7 Per Unit
Variable Factory OH	=4,185/1550
	2.7 Per Unit
Variable Selling Expense	= 1,705/1550
	1.1 Per Unit
Accountants Estimate of Total Variable Cost f December
Unit Predicted in December	1725 units
Direct Labour	= 1725 X 3.6
	$6,210
Direct Labour	1725 X 4.7
	$8,107.50
Factory OH	1725 X 2.7
	$4,657.50
Selling Expense	1725 X 1.1
	$1,897.50
Total Variable Cost	= 6,210+8,107.50+,4,657.5+1,897.50
	$20,872.50
B)
Computation of Variable cost and Fixed cost in High - Low Method
Total Cost for 1550 Unit	= $30,495
Total Cost For 2,350 Units	= $41,263
Variable Cost Per Unit	= Difference in Total Cost/Difference in Unit
	=(41,263-30,495)/(2,350-1,550)
	= 10,768/800
	13.46 Per Unit
Total Variable Cost for 2350 Units	= 2350 X 13.46
	=$31,631
Fixed Cost	= 41,263-31,631
	= $9,632
1) Fixed Cost under High-Low Mothed
Fixed Cost for 1,725 units	=$9,632
2) Variable Cost Under High-Low Method
Variable Cost for 1,725 units	= units Produced X Variable Cost per Unit
Variable Cost	= 1725 X 13.46
	=$23,218.50
Total Cost for 1725 units	= 9,632 + 23,218.50
	= $32,850.50