Question

High-Low Method

Luisa Crimini has been operating a beauty shop in a college town for the past 10 years. Recently, Luisa rented space next to her shop and opened a tanning salon. She anticipated that the costs for the tanning service would primarily be fixed, but found that tanning salon costs increased with the number of appointments. Costs for this service over the past 8 months are as follows:

Month		Tanning Appointments			Total Cost
January		1,600			$1,754
February		2,000			2,140
March		3,500			2,790
April		2,500			2,400
May		1,500			1,790
June		2,300			2,275
July		2,150			2,200
August		3,000			2,640

Required:

1. Which month represents the high point? The low point?

High point
Low point

2. Using the high-low method, compute the variable rate for tanning. Compute the fixed cost per month. Round the variable rate per tanning appointment to the nearest cent.

Variable rate for tanning	$ per tanning appointment
Fixed cost per month	$

3. Using the variable rate and fixed cost, what is the cost formula for tanning services?

4. Calculate the total predicted cost of tanning services for September for 2,500 appointments using the formula found in Requirement 3. Of that total cost, how much is the total fixed cost for September? How much is the total predicted variable cost for September? In your calculations, round variable cost per unit to the nearest cent. If required, round the final answers to the nearest dollar.

Total predicted cost for September	$
Total fixed cost for September	$
Total predicted variable cost for September	$

5. Which of the following statements is correct when luisa uses the high-low method to estimate the costs?

Answer 1

• High Low working

	Months	Units	Cost
High Level	March	3,500	$                     2,790.00
Low Level	May	1,500	$                     1,790.00
Difference		2,000	$                     1,000.00
A	Difference in Cost		$                     1,000.00
B	Difference in units		2,000
C = A/B	Variable cost per unit		$                             0.50
Working		High Level	Low Level
A	Total Cost	$                   2,790.00	$                     1,790.00
B	Total Units	3500	1500
C	Variable cost per unit	$                          0.50	$                             0.50
D = B x C	Total Variable cost	$                   1,750.00	$                         750.00
E = A - D	Total Fixed Cost	$                   1,040.00	$                     1,040.00

• [1]
  High Point = March
  Low month = May
• [2]
  Variable cost = $ 0.50 per tanning appointment
  Fixed Cost = $ 1040
• [3]
  Formula: Tanning service cost = $ 1040 fixed cost + ($0.50 x no. of tanning appointments)
• [4]
  .

Total predicted cost for September [1250 + 1040]	$ 2290
Total fixed cost for September	$ 1040
Total predicted variable cost for September [$0.50 x 2500]	$ 1250