Question

Question # 1

Big Dave’s Bowling Ball Factory has the following financial information:

Month	Units Produced	Manufacturing Costs (in$)
July	648	1,748
August	653	1,770
September	652	1,758
October	650	1,755
November	700	1,800
December	660	1,780
January	550	1,500
February	600	1,600
March	647	1,750
April	653	1,760
May	652	1,740
June	655	1,769
Total	7,720	20,730

There were no beginning or ending inventories. The selling cost is $3/unit.

Required:

1. Using the High-Low method Calculate the total cost formula in the form “Y = aX+b”
2. What are the total estimated manufacturing costs if production is forecasted at 580 units?

Answer 1

Answer-1)- Cost formula - y = $2X+$400

2)- Total manufacturing costs at 580 units = $1560.

Explanation:-

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 = 700 units; y2 = $1800
at lowest activity: x1 = 550 units ; y1 = $1500

Variable Cost per unit = ($1800- $1500) /(700 units – 550 units)  

= $300/150 units

= $2 per unit
Total Fixed Cost = $1800 − ($2 per unit*700 units)

= $1800 – $1400

=$400

1)-Cost formula- Y = $2X+ $400

2)- Total manufacturing costs at 580 units = (580 units*$2 per unit) + $400

= $1160+$400

= $1560