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In: Accounting

Required information Skip to question [The following information applies to the questions displayed below.] Professor John...

Required information

Skip to question

[The following information applies to the questions displayed below.]

Professor John Morton has just been appointed chairperson of the Finance Department at Westland University. In reviewing the department’s cost records, Professor Morton has found the following total cost associated with Finance 101 over the last five terms:

Term Number of
Sections Offered		 Total Cost
Fall, last year 6 $ 12,000
Winter, last year 4 $ 8,000
Summer, last year 5 $ 8,500
Fall, this year 3 $ 7,000
Winter, this year 7 $ 13,000

Professor Morton knows that there are some variable costs, such as amounts paid to graduate assistants, associated with the course. He would like to have the variable and fixed costs separated for planning purposes.

3-a. Assume that because of the small number of sections offered during the Winter Term this year, Professor Morton will have to offer nine sections of Finance 101 during the Fall Term. Compute the expected total cost for Finance 101.

3-b. Can you see any problem with using the cost formula from (2) above to derive this total cost figure?

Solutions

Expert Solution

to seperate the fixed and variable costs using high low method ( using the highest and lowest cost scenarios)

Total costs = fixed cost + variable costs

variable costs = no of sessions x rate

13000 = fixed costs + 7 x rate

7000 = fixed costs + 3 x rate

subtract both equations

6000 = 4 x rate

rate = $1500 per session

substituting rate in equation

13000 = fixed costs + 7 x 1500

fixed costs = 13000 - 10500. = 2500

so for 9 sessions

cost = 2500 + 9 x 1500

cost = 16000

The problem encountered is that the equation of cost = 2500 + no of sessions x 1500 does not hold true for all the scenarios

for example,

using the equation winter last year = 2500 + 4 x 1500 = 8500 but actually it is only 8000

Such deviations are expected and normal when fitting a regression equation and using the high low method ( like we did) is the best approach.

Thanks , if you have any doubts please leave a comment and let me know

ekkarill92 answered 1 year ago
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