Question

1. The following data relating to units shipped and total shipping expense have been assembled by XYZ Company, a wholesaler of large, custom-built air-conditioning units for commercial buildings:

Month	Units Shipped	Total Shipping Expense
January	4	$ 1,800
February	6	$ 2,300
March	4	$ 1,700
April	5	$ 2,000
May	7	$ 2,300
June	8	$ 2,700
July	2	$ 1,200

Required:

1. Using the high-low method, estimate a cost formula for shipping expense.
2. Using the cost formula you derived above, what amount of total shipping expense would you expect to be incurred if 10 units will be shipped?
3. What factors, other than the number of units shipped, do think are likely to affect the company's total shipping expense?

2. Because of Covid-19, some companies around the world have chosen to minimize fixed capacity costs. However, every company has some costs to which it is committed. Distinguish between committed fixed costs and discretionary fixed costs. Give three examples for each.

Answer 1

A.

1.

Variable cost per unit = Highest cost - lowest cost / highest unit - lowest unit

Variable cost per unit = (2700 - 1200) / (8 - 2)

Variable cost per unit = 1500 / 6

Variable cost per unit = $250 per unit

Fixed cost = highest cost - variable cost per unit * highest unit

Fixed cost = 2700 - (250 * 8)

Fixed cost = 2700 - 2000

Fixed cost = $700

Cost formula = a + bx

Cost formula = fixed cost + variable cost per unit * no of units (x)

Cost formula = 700 + 250x

2.

Total shipping expense = 700 + 250x

Total shipping expense = 700 + 250 * 10

Total shipping expense = 700 + 2500

Total shipping expense = 3200

3.

The factors that are likely to affect the company's total shipping expense could be a lack of transportation or a sudden demand for an efficient labor.

B.

Committed fixed costs:

Committed fixed costs are referred to as those costs that cannot be eliminated from the budgeting process easily. These are the fixed costs that are necessary for the smooth operation of the business. For example; insurance, rent, depreciation.

Discretionary fixed costs:

Discretionary fixed costs are referred to as those costs that do not occur on a regular basis. These costs are incurred for a specific period of time or for a specific job. These can be eliminated easily and their elimination will not happen the functioning of the business. for example; advertising costs, research and development costs, charitable contributions.