Question

Mears Production Company makes several products and sells them for an average price of $85. Mears' accountant is considering two different approaches to estimating the firm's total monthly cost function, 1) account analysis, and 2) 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 February, when production was 1,700 units. The following are the results of that analysis:

Cost Item	Total Cost	Fixed Cost	Variable Cost
Direct materials	$7,480	$0	$7,480
Direct labor	$8,840	$0	$8,840
Factory overhead	$7,780	$3,360	$4,420
Selling expenses	$7,100	$3,700	$3,400
Administrative expenses	$3,100	$3,100	$0
Total expenses	$34,300	$10,160	$24,140

For the high-low method, she developed the cost function using the data from February above and data from May, when production was 2,500 units and total costs were $46,928.

After developing the two cost functions, the accountant used them to make predictions for the month of October, when production was expected to be 2,250 units.

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

Part A (5 tries; 5 points)
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 (5 tries; 5 points)
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

Fixed costs are constant in nature they remain same at all levels of units produced

whereas variable costs changes with change in units

A

(1) Using account analysis, what was the accountant's estimate of total fixed costs for October?   

Fixed cost would remain same = $10,160

B.

Cost Item	Total Cost	Fixed Cost	Variable Cost	VARIABLE COST PER UNIT
Direct materials	$7,480	$0	$7,480
Direct labor	$8,840	$0	$8,840
Factory overhead	$7,780	$3,360	$4,420
Selling expenses	$7,100	$3,700	$3,400
Administrative expenses	$3,100	$3,100	$0
Total expenses	$34,300	$10,160	$24,140	$14.2[$24,140/1,700]

TOTAL VARIABLE COST = $14.2*2,250 UNITS

=$31,950

PART B

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

	unit	Cost
High	2500	$46,928
Low	1700	$34,300
Change	800[2500-1700]	$12,628[46,928-34,300]

2 ] Variable cost = change in cost/ change in units

=$12,628/800

=$15.79 [round to nearest cent]

1 ] Y= a+bX

Y = Total cost

a= fixed cost

b= variable cost per unit

X= units

$34,300=fixed cost+$15.79*1,700

$34,300=fixed cost +$26,843

Fixed cost = $7,457

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