Question

Zachary Woodcraft Company manufactures “antique” wooden cabinets to house modern televisions. The Company began operations in January of last year. Sidney Myrick, the owner, asks for your assistance. He believes that he needs to better understand the cost of the cabinets for pricing purposes. You have collected the following data concerning actual production over the past year:

	Number of
Month	Cabinets Produced		Total Cost
January	870		$	21,300
February	3,650			33,100
March	1,960			29,600
April	630			18,200
May	1,620			28,300
June	1,330			27,300
July	1,160			25,700
August	1,790			31,400
September	2,300			32,700
October	2,990			31,500
November	3,330			32,100
December	300			9,650

Required

1. To understand the department’s cost behavior, you decide to plot the points on graph paper and sketch a total cost line.

1. (1) Enter the number of units and their costs in increasing order.
   

2. Using the high-low method, compute the total cost equation for the preceding data.

1. (1) Compute the variable cost per unit.

2. (2) Compute total fixed costs.

3. (4) Calculate the total cost assuming 1,900 cabinets are made.
   

Using the high-low method, compute the total cost equation for the preceding data. Compute the variable cost per unit, total fixed costs, and total cost assuming 1,900 cabinets are made. (Round “variable cost per unit” answer to 4 decimal places.)

	Variable cost per unit Total fixed costs Total costs

Answer 1

In December only 300 cabinets were produced and the total cost is $9,650.

In February 3,650 cabinets were produced and the total cost is $33,100.

Therefore,

Total cost of high activity = $33,100

Total cost of low activity = $9,650

Highest activity units = 3,650

Lowest activity units = 300

High & Low Method:

Variable cost per unit = (Total cost of high activity - Total cost of low activity)/ (Highest activity units - Lowest activity units)

= ($33,100 - $9,650)/ (3,650 - 300)

= ($23,450)/ (3,350) = 7

Variable cost per unit = $7

Total cost = variable cost + fixed cost

Total cost of Lowest activity = (Lowest activity units * Variable cost per unit) + fixed cost

$9,650 = (300 * $7) + fixed cost

$9,650 = $2,100 + fixed cost

fixed cost = $9,650 - $2,100 = $7,550

Total Fixed Costs = $7,550

Total cost for 1,900 cabinets produced:

Activity units = 1,900

Variable cost per unit = $7

Total fixed cost = $7,550

Total cost = variable cost + Total fixed cost

= (Variable cost per unit * Activity units) + Total fixed cost

= ($7 * 1,900) + $7,550

= $13,300 + $7,550

Total cost = $20,850