Question

Grawburg Inc. maintains a call center to take orders, answer questions, and handle complaints. The costs of the call center for a number of recent months are listed below:

	Calls Taken	Call Center Cost
April	7560	$	81,960
May	7529	$	81,773
June	7570	$	82,025
July	7568	$	81,997
August	7535	$	81,816
September	7549	$	81,895
October	7592	$	82,156
November	7579	$	82,092

Management believes that the cost of the call center is a mixed cost that depends on the number of calls taken.

Calculate the following using the high-low method:

Variable Cost per unit produced (round to 2 decimal place)	$
Overall Fixed Cost portion of Inspection Costs (round to 2 decimal place)	$
Cost equation for Inspection Costs (in the linear equation format)	Y=
Estimated Inspection costs when 973 units are produced (round to nearest whole dollar)	$

Please explain how you got answers!

Answer 1

Answer- Variable Cost per unit = $6.08 per unit produces

Total Fixed Cost =$35996.64

Cost equation for Inspection Costs - y = $35996.64 + $6.08x

Estimated Inspection costs = $41912

Explanation:-

High-Low Method:-

Variable Cost per Unit

Variable cost per unit (b) is calculated using the following formula:

Variable cost per unit = (Y2-Y1)/(X2-X1)

Where,
y2 is the total cost at highest level of activity;
y1 is the total cost at lowest level of activity;
x2 are the number of units/miles/ labor ,machine hours etc. at highest level of activity; and
x1 are the number of units/miles/ labor, machine hours etc. at lowest level of activity

The variable cost per unit is equal to the slope of the cost volume line (i.e. change in total cost ÷ change in number of machine hours).

Total Fixed Cost

Total fixed cost (a) is calculated by subtracting total variable cost from total cost, thus:

Total Fixed Cost = (y2 – b)*x2 = (y1 – b*x1)

We have,
at highest activity: x₂ = 7592 call taken; y₂ = $82156
at lowest activity: x₁ = 7529 call taken; y₁ = $81773

1)-Variable Cost per unit = ($82156-$81773) /(7592 units −7529 units)  

= $383/63 units

= $6.08 per unit produced
Total Fixed Cost = $82156 − ($6.08 per unit*7592 units)

= $82156– $46159.36

=$35996.64

Cost equation for Inspection Costs - y = $35996.64 + $6.08x

Estimated Inspection costs = (973 units*$6.08 per unit)+ $35996.64

= $5915.84+$35996.64

= $41912