Question

1. High-Low Method for a Service Company

Boston Railroad decided to use the high-low method and operating data from the past six months to estimate the fixed and variable components of transportation costs. The activity base used by Boston Railroad is a measure of railroad operating activity, termed “gross-ton miles,” which is the total number of tons multiplied by the miles moved.

	Transportation Costs		Gross-Ton Miles
January	$929,600		247,000
February	1,036,400		276,000
March	732,500		179,000
April	993,700		268,000
May	833,400		215,000
June	1,068,500		291,000

Determine the variable cost per gross-ton mile and the fixed cost.

Variable cost (Round to two decimal places.)	$ ___________ per gross-ton mile
Total fixed cost	$___________

2.

Contribution Margin and Contribution Margin Ratio

For a recent year, Wicker Company-owned restaurants had the following sales and expenses (in millions):

Sales	$34,700
Food and packaging	$9,326
Payroll	8,800
Occupancy (rent, depreciation, etc.)	10,534
General, selling, and administrative expenses	5,000
	$33,660
Income from operations	$1,040

Assume that the variable costs consist of food and packaging, payroll, and 40% of the general, selling, and administrative expenses.

a. What is Wicker Company's contribution margin? Round to the nearest million. (Give answer in millions of dollars.)
$ _______million

b. What is Wicker Company's contribution margin ratio? Round to one decimal place.
_______ %

c. How much would income from operations increase if same-store sales increased by $2,100 million for the coming year, with no change in the contribution margin ratio or fixed costs? Round your answer to the closest million.
$ ________ million

Answer 1

1. To determine the variable cost per gross-ton mile, divide the difference between the highest and lowest transportation costs by the difference between the highest and lowest gross-ton miles.

= (1,068,500 - 732,500) / (291,000 - 179,000)

= 336,000 / 112,000

= $ 3 per gross ton mile

Now, Total cost = Variable cost per gross-ton mile x (highest/lowest) gross ton miles + fixed costs

1,068,500 = (3 * 291,000) + Fixed cost

Fixed cost = 1,068,500 - 873,000

Fixed cost = 195,500

2. (A)

Particulars	Amount	Amount
Sales		34,700
Less: Variable costs
Food and packaging	9,326
Payroll	8,800
General S&D expenses (5,000 * 40%)	2,000
Total variable cost		20,126
Contribution margin		14,574

(b) Contribution margin ratio = Contribution margin/ Sales * 100

= 14,574 / 34,700 * 100

= 42%

(c) Increase in income = Incremental sales * Contribution margin ratio

= 2100 million * 42%

= $ 882 million