Question

High-Low Method, Cost Formulas

The controller of the South Charleston plant of Ravinia, Inc., monitored activities associated with materials handling costs. The high and low levels of resource usage occurred in September and March for three different resources associated with materials handling. The number of moves is the driver. The total costs of the three resources and the activity output, as measured by moves for the two different levels, are presented as follows:

Resource		Number of Moves		Total Cost
Forklift depreciation:
Low		5,000		$2,000
High		15,000		2,000
Indirect labor:
Low		5,000		$79,000
High		15,000		119,000
Fuel and oil for forklift:
Low		5,000		$3,600
High		15,000		10,800

Required:

If required, round your answers to two decimal places. Enter a "0" if required.

1. Determine the cost behavior formula of each resource. Use the high-low method to assess the fixed and variable components.

Forklift depreciation:
V	$
F	$
Y	$
Indirect labor:
V	$
F	$
Y	$ + $X
Fuel and oil for forklift:
V	$
F	$
Y	$X

2. Using your knowledge of cost behavior, predict the cost of each item for an activity output level of 10,000 moves.

Forklift depreciation	$
Indirect labor	$
Fuel and oil for forklift	$

3. Construct a cost formula that can be used to predict the total cost of the three resources combined. If required, round your answers to two decimal places.
Materials handling cost = $ + $X

Using this formula, predict the total materials handling cost if activity output is 10,000 moves.
Y = $

Answer 1

1)

Forklift depreciation : Remains same /constant irrespective of number of moves ,Thus it is a fixed cost.

V	0
F	2000
Y	2000

Indirect labor:

Variable cost per moves =Change in cost /change in activity

            = [119000-79000]/[15000-5000]

            = 40000/10000

              =$ 4 per move

Fixed cost :

	Total cost	-	Variable cost	=	Fixed cost
At 15000 Moves	119000		15000*4=60000		59000
At 5000 moves	79000		5000*4=20000		59000

V	4X
F	59000
Y	59000+4X

Fuel and oil for forklift: Since it remains constant in per unit (per moves) ,it is a variable cost

Variable cost per move =[3600/5000 ] or [10800/15000]

                   = $.72 per moves

V	.72 X
F	0
Y	.72 X

2)

	Cost
Forklift depreciation	2000
Indirect labor	59000+(4*10000) 59000+40000 99000
Fuel and oil for forklift:	.72*10000= 7200

3)

Materials handling cost = [2000+59000] Fixed + [4+.72]*Number of moves

                        = 61000+ 4.72 X

Y= 61000+(4.72*10000)

   = 61000+ 47200

   = 108200