Question

QUESTION 1

Inspection costs at one of Ratulowski Corporation's factories are listed below:

	Units Produced			Inspection Costs
April		906		$	16,312
May		951		$	16,700
June		912		$	16,365
July		896		$	16,210
August		918		$	16,394
September		903		$	16,280
October		920		$	16,432
November		860		$	15,850
December		899		$	16,238

Management believes that inspection cost is a mixed cost that depends on units produced.

Calculate the following using the high-low method:

Variable Cost per unit produced (round to 2 decimal place)	$
Overall Fixed Cost portion of Inspection Costs (round to 2 decimal place)	$
Cost equation for Inspection Costs (in the linear equation format)	Y=
Estimated Inspection costs when 973 units are produced (round to nearest whole dollar)	$

12 points

Answer 1

Answer:-High-Low Method:-

Variable Cost per Unit

Variable cost per unit (b) is calculated using the following formula:

Variable cost per unit=Y2-Y1/X2-X1

Where,
y2 is the total cost at highest level of activity;
y1 is the total cost at lowest level of activity;
x2 are the number of units/miles/ labor ,machine hours etc. at highest level of activity; and
x1 are the number of units/miles/ labor, machine hours etc. at lowest level of activity

The variable cost per unit is equal to the slope of the cost volume line (i.e. change in total cost ÷ change in number of machine hours).

Total Fixed Cost

Total fixed cost (a) is calculated by subtracting total variable cost from total cost, thus:

Total Fixed Cost = y2 – b*x2 = y1 – b*x1

We have,
at highest activity: x₂ = 951 units; y₂ = $16700
at lowest activity: x₁ = 860 units; y₁ = $15850

Variable Cost per unit = ($16700− $15850) ÷ (951 −860)  

= $850/91 units =$9.34 per unit

Total Fixed Cost = $16700 − ($9.34 × 951) = $16700 – $8882.34 =$7817.6

The estimated inspection costs =

Variable costs+ Fixed costs

=(973 units*$9.34 per unit)+$7817.66

=$9087.82+$7817.66 =$16905

Cost Equation Formula: y = $7817.66 + $9.34x