Question

Using High-Low to Calculate Fixed Cost, Calculate the Variable Rate, and Construct a Cost Function

Pizza Vesuvio makes specialty pizzas. Data for the past 8 months were collected:

Month		Labor Cost			Employee Hours
January		$7,000			360
February		8,140			550
March		9,899			630
April		9,787			610
May		8,490			480
June		7,450			350
July		9,490			570
August		7,531			310

Pizza Vesuvio's controller wants to calculate the fixed and variable costs associated with labor used in the restaurant.

In your calculations, round the variable rate per employee hour to the nearest cent.

Required:

1. Using the high-low method, calculate the fixed cost of labor.
$

2. Using the high-low method, calculate the variable rate.

$ per employee hour

3. Using the high-low method, construct the cost formula for total labor cost.

Total labor cost = $ + [$ × Employee hours]

Answer 1

• All working forms part of the answer
• Answers are below ‘workings’
• Workings: High Low Method

--Step 1

	Months	hours	Cost
High Level	Mar	630	$                     9,899.00
Low Level	Aug	310	$                     7,531.00
Difference		320	$                     2,368.00

--Step 2

Difference in Cost	$                                                               2,368.00
Difference in hours	320
Variable cost per hour [Requirement 2]	$                                                                       7.40

--Step 3

Working		High Level	Low Level
A	Total Cost	$                   9,899.00	$                     7,531.00
B	Total hours	630	310
C	Variable cost per hour	$                           7.40	$                             7.40
D = B x C	Total Variable cost	$                   4,662.00	$                     2,294.00
E = A - D	Total Fixed Cost [Requirement 1]	$                   5,237.00	$                     5,237.00

• Answers

--Requirement 1: Fixed Cost of Labor = $ 5,237

--Requirement 2: Variable rate = $ 7.40 per employee hour

--Requirement 3: Cost Formula = Fixed Cost + Variable cost per hours x No. of hours

Total Labor Cost = a +bx
Total Labor Cost = $ 5,237 + [$ 7.40 x Employee hours]