Question

A company offers machine rental services for material cutting. Consider the following costs of the company over the relevant range of 4,000 to 10,000 hours of operating time for its cutting equipment

Total costs:	4,000 hours	5,000 hours	8,000 hours	10,000 hours
Variable costs	$20,000	?	?	?
Fixed costs	82,000	?	?	?
Total costs	102,000	?	?	?
Cost per hour:
Variable costs	?	?	?	?
Fixed costs	?	?	?	?
Total cost per hour	?	?	?	?

A. What is the estimated total cost per hour at a volume of 8,000 hours?

B. What are the estimated total fixed costs at a volume of 10,000 hours?

C. What is the estimated total fixed cost per hour at a volume 8,000 hours?

D. What is the primary advantage of the High-Low method over the cost estimations?

Answer 1

Solution:

A. Estimated total cost per hour at a volume of 8,000 hours = $15.25 per hour ( Note:1)

B. Estimated total fixed costs at a volume of 10,000 hours = $ 82,000 ( Note:1)

C. Estimated total fixed cost per hour at a volume 8,000 hours = $ 10.25 per hour ( Note:1)

D. Following are the advantage of the High-Low method over the cost estimations:

1) It is very simple.

2) Easy way to segregate fixed and variable costs and it requires only two data values i.e., high and low activity levels

3) High-Low method does not uses complex tools or programs.

4) It is inexpensive to implement in the organisations

Note:

1) Calculation of variable, fixed and total costs

Total Costs	4000 hours	5,000 hours	8,000 hours	10,000 hours
Variable costs	$     20,000.00	$    25,000.00	$    40,000.00	$    50,000.00
Fixed costs	$     82,000.00	$    82,000.00	$    82,000.00	$    82,000.00
Total costs	$ 102,000.00	$ 107,000.00	$ 122,000.00	$ 132,000.00
Cost per hour:
Variable costs	$               5.00	$               5.00	$               5.00	$               5.00
Fixed costs	$             20.50	$            16.40	$            10.25	$               8.20
Total costs	$             25.50	$            21.40	$            15.25	$            13.20

2) Variable cost per unit does not change with change in hours, but total variable cost changes with change in number of hours

Variable cost per hour = $20000/ 4000 hours = $5

3) Total fixed cost does not change with change in hours, but fixed cost per unit changes with change in number of hours.

Fixed cost does not change($82000) but per unit changes with increase and decrease in hours.