Question

1. High-Low Method

   Luisa Crimini has been operating a beauty shop in a college town for the past 10 years. Recently, Luisa rented space next to her shop and opened a tanning salon. She anticipated that the costs for the tanning service would primarily be fixed, but found that tanning salon costs increased with the number of appointments. Costs for this service over the past 8 months are as follows:

   		Tanning
   Month		Appointments			Total Cost
   January		800			$1,758
   February		2,100			$2,150
   March		3,200			$2,790
   April		2,500			$2,500
   May		1,600			$1,800
   June		2,200			$2,255
   July		2,150			$2,300
   August		3,000			$2,640

   Required:

   1. Which month represents the high point? The low point?

   High point
   Low point

   In your calculations, round per unit costs to the nearest cent.

   2. Using the high-low method, compute the variable rate for tanning. Compute the fixed cost per month. Round the variable rate per tanning appointment to the nearest cent and use it in your further calculations. Round the fixed cost per month to the nearest dollar and use it in your further calculations.

   Variable rate for tanning	$ per tanning appointment
   Fixed cost per month	$

   3. Using the variable rate and fixed cost, what is the cost formula for tanning services?
   
   

   4. Calculate the total predicted cost of tanning services for September for 2,500 appointments using the formula found in Requirement 3. Of that total cost, how much is the total fixed cost for September? How much is the total predicted variable cost for September? If required, round the final answers to the nearest dollar.

   Total predicted cost for September	$
   Total fixed cost for September	$
   Total predicted variable cost for September	$

   5. Which of the following statements is correct when luisa uses the high-low method to estimate the costs?

Answer 1

high low method uses the cost at highest activity and lowest activity to separate fixed & variable cost from mixed costs.

1.High point = March because it have highest tanning appointments

low point = January because it have lowest tanning appointments

2.

	Cost	Units
High	$2,790	3200
Low	$1758	800
Changes	1032 [$2790-1758]	2,400 [3200-800]

variable cost per appointment = change in cost/ change in units

=$1032/2400

=$0.43 per tanning apt

Total cost = fixed cost+variable cost

$2,790 = fixed cost +$0.43*3200

$2,790= fixed cost+1,376

fixed cost = $1,414

calculations.

Variable rate for tanning	$0.43 per tanning appointment
Fixed cost per month	$1414

3.cost fromual

y = a+bX

y = total cost

a= fixed cost

b= variable cost per tanning appointment

X= number of appointments

Y=$1,414+ $0.43X

Total tanning service cost = $1,414 + ($0.43*Number of appointments)

4.

X= 2,500

Y = $1,414 +$0.43*2,500

=$1,414+$1,075

=$2,489

Total predicted cost for September	$2,489
Total fixed cost for September	$1,414 (it is fixed and remain same irrespective of number of appointments]
Total predicted variable cost for September	$1,075

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