Question

Mears Production Company makes several products and sells them for an average price of $75. Mears' accountant is considering two different approaches to estimating the firm's total monthly cost function, account analysis and high-low. In both cases, she used units of production as the independent variable. For the account analysis approach, she developed the cost function by analyzing each cost item in June, when production was 1,950 units. The following are the results of that analysis:

COST ITEM	TOTAL COST	VARIABLE COST	FIXED COST
Direct Materials	$8,775	$8,775	$0
Direct Labor	$9,945	$9,945	$0
Factory Overhead	$8,375	$5,265	$3,110
Selling Expsenses	$7,325	$3,705	$3,620

Admin Expenses	$4,450	$0	$4,450
TOTAL EXPENSES	$38,870	$27,690	$11,180

For the high-low method, she developed the cost function using the same data from June and data from August, when production was 2,500 units and total costs were $47,969.

After developing the two cost functions, the accountant used them to make predictions for the month of October, when production was expected to be 2,125 units.

REQUIRED [ROUND UNIT COSTS TO THE NEAREST CENT AND TOTAL COSTS TO THE NEAREST DOLLAR.]

Part A
1. Using account analysis, what was the accountant's estimate of total fixed costs for October?    

2. Using account analysis, what was the accountant's estimate of total variable costs for October?   


Part B
1. Using the high-low method, what was the accountant's estimate of total fixed costs for October?    

2. Using the high-low method, what was the accountant's estimate of variable costs per unit for October?

Answer 1

A1. Total fixed costs for October: $11180

Cost Item	Fixed Cost
Factory overhead	3110
Selling expenses	3620
Admin expenses	4450
Total fixed cost $	11180

A2. Total variable costs for October: $30175

Cost Item	Variable Cost
Direct materials	8775
Direct labor	9945
Factory overhead	5265
Selling expenses	3705
Total variable cost for June $	27690
Number of units produced in June	1950
Variable cost per unit $	14.20
Number of units produced in October	2125
Total variable cost for October $	30175

B1. Total fixed costs for October: $6619 or $6617

Variable costs per unit for October: $16.54

	Production	Total Cost
High activity level (August)	2500	$   47,969
Low activity level (June)	1950	$   38,870
Change	550	$      9,099

Variable cost per unit = $9099/550 = $16.54

Fixed cost (at high level) = $47969 - (2500 x $16.54) = $47969 - $41350 = $6619

Fixed cost (at low level) = $38870 - (1950 x $16.54) = $38870 - $32253 = $6617

Note: For the total fixed costs, please try $6617 or $6619 since the high and low levels are giving different answers probably due to rounding off.