Question

Cost Behavior Analysis in a Restaurant: High-Low Cost Estimation
Assume a Papa John's restaurant has the following information available regarding costs at representative levels of monthly sales:

	Monthly sales in units
	5,000	8,000	10,000
Cost of food sold	$10,000	$16,000	$20,000
Wages and fringe benefits	4,200	4,320	4,400
Fees paid delivery help	1,100	1,760	2,200
Rent on building	1,100	1,100	1,100
Depreciation on equipment	900	900	900
Utilities	800	920	1,000
Supplies (soap, floor wax, etc.)	250	340	400
Administrative costs	1,700	1,700	1,700
Total	$20,050	$27,040	$31,700

(a) Identify each cost as being variable, fixed, or mixed.

Cost of food sold
AnswerVariableFixedMixed

Wages and fringe benefits
AnswerVariableFixedMixed

Fees paid delivery help
AnswerVariableFixedMixed

Rent on building
AnswerVariableFixedMixed

Depreciation on equipment
AnswerVariableFixedMixed

Utilities
AnswerVariableFixedMixed

Supplies (soap, floor wax, etc.)
AnswerVariableFixedMixed

Administrative costs
AnswerVariableFixedMixed

(b) Use the high-low method to develop a schedule identifying the amount of each cost that is fixed per month or variable per unit. Total the amounts under each category to develop an equation for total monthly costs.

Round variable cost answers to two decimal places.

	Fixed Costs	Variable Costs
Cost of food sold	Answer	Answer
Wages and fringe benefits	Answer	Answer
Fees paid delivery help	Answer	Answer
Rent on building	Answer	Answer
Depreciation on equipment	Answer	Answer
Utilities	Answer	Answer
Supplies (soap, floor wax, etc.)	Answer	Answer
Administrative costs	Answer	Answer
Total costs equation	Answer	Answer

(c) Predict total costs for a monthly sales volume of 9,800 units.
$Answer

Answer 1

(a)

Cost of food sold	Variable
Wages and fringe benefits	Mixed
Fees paid delivery help	Variable
Rent on building	Fixed
Depreciation on equipment	Fixed
Utilities	Mixed
Supplies (soap, floor wax, etc.)	Mixed
Administrative costs	Fixed

(b)

	Fixed Costs	Variable Costs
Cost of food sold	0	2.00
Wages and fringe benefits	4000	0.04
Fees paid delivery help	0	0.22
Rent on building	1100	0
Depreciation on equipment	900	0
Utilities	600	0.04
Supplies (soap, floor wax, etc.)	100	0.03
Administrative costs	1700	0
Total costs equation	8400	2.33

Workings:

Wages and fringe benefits:

Variable cost = ($4400 - $4200)/(10000 - 5000) = $200/5000 = $0.04 per unit

Fixed costs = $4400 - (10000 x $0.04) = $4400 - 400 = $4000

Utilities:

Variable cost = ($1000 - $800)/(10000 - 5000) = $200/5000 = $0.04 per unit

Fixed costs = $1000 - (10000 x $0.04) = $1000 - $400 = $600

Supplies (soap, floor wax, etc.):

Variable cost = ($400 - $250)/(10000 - 5000) = $150/5000 = $0.03

Fixed cost = $400 - (10000 x $0.03) = $400 - $300 = $100

(c) Total costs for monthly sales volume of 9800 units: $31234

Total costs = Fixed costs + Variable costs = $8400 + (9800 x $2.33) = $8400 + $22834 = $31234