Question

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 600 $1,750 February 2,000 $2,130 March 3,400 $2,730 April 2,600 $2,500 May 1,400 $1,800 June 2,300 $2,285 July 2,190 $2,200 August 3,000 $2,650 Required: 1. Which month represents the high point? The low point? High point March Low point January 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 $ 0.41 per tanning appointment Fixed cost per month $ 1,457 3. Using the variable rate and fixed cost, what is the cost formula for tanning services? Total tanning service cost = $1540 + ($0.35 x Number of appointments) 4. Calculate the total predicted cost of tanning services for September for 2,600 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

Answer 1

Answer to Requirement 1.
High Point = March
Low point = January

Answer to Requirement 2.
As per High- Low method,
Variable Cost Rate = y2 – y1 / x2 – x1

Total Cost at the Highest level of activity (y2) = $2,730
Total Cost at the Lowest level of activity (y1) = $1,750
Units at the Highest level of activity (x2) = 3,400
Units at the Lowest level of activity (x1) = 600

Variable Cost Rate = ($2,730 - $1,750) / (3,400 – 600)
Variable Cost Rate = $980 / 2,800
Variable Cost Rate = $0.35 per appointment

Total Cost = a + bx
Total Cost at an activity level of 3,400 appointment = $2,730
$2,730 = a + ($0.35 * 3,400)
a = $1,540

Therefore, Fixed Cost per month is $1,540

Answer to Requirement 3.

Total Cost for Tanning Services = $1,540 + ($0.35 * Number of Appointments)

Answer to Requirement 4.

Number of appointments in September = 2,600
Total Cost for Tanning Services = $1,540 + ($0.35 * Number of Appointments)
Total Cost for Tanning Services = $1,540 + ($0.35 * 2,600)
Total Cost for Tanning Services = $2,450

Total fixed cost for September = $1,540
Total predicted variable cost for September = $910