Question

Cost Behavior Analysis in a Restaurant: High-Low Cost Estimation
Assume a Potbelly’s restaurant has the following information available regarding costs at representative levels of monthly sales (meals served):

	Monthly sales in units
	5,000	7,000	10,000
Cost of food sold	$ 7,500	$10,500	$15,000
Wages and fringe benefits	5,900	5,940	6,000
Fees paid delivery help	6,000	8,400	12,000
Rent on building	3,500	3,500	3,500
Depreciation on equipment	850	850	850
Utilities	600	640	700
Supplies (soap, floor wax, etc.)	400	480	600
Administrative costs	1,200	1,200	1,200
Total	$25,950	$31,510	$39,850

(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 mixed 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	X
Wages and fringe benefits	Answer	Answer	X
Fees paid delivery help	Answer	Answer	X
Rent on building	Answer	Answer	X
Depreciation on equipment	Answer	Answer	X
Utilities	Answer	Answer	X
Supplies (soap, floor wax, etc.)	Answer	Answer	X
Administrative costs	Answer	Answer	X
Total costs equation	Answer	Answer	X

* where X = Unit sales

(c) Predict total costs for a monthly sales volume of 8,500 units.

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.

High low method = High cost - Low cost / High activity - Low activity

Wages and fringe benefits:

Variable cost per unit = $6,000 - 5,900 / 10,000 - 5,000 = $0.02

Fixed costs = $6,000 - 200(10,000*$0.02) = $5,800

Utilities:

Variable cost per unit = $700 - 600 / 10,000 - 5,000 = $0.02

Fixed costs = $700 - 200(10,000*$0.02) = $500

Supplies (soap, floor wax, etc.)

Variable cost per unit = $600 - 400 / 10,000 - 5,000 = $0.04

Fixed costs = $600 - 400(10,000*$0.04) = $200

	Fixed cost	Variable cost	X
Cost of food sold	$0	$1.5	X
Wages and fringe benefits	5,800	0.02	X
Fees paid delivery help	0	1.2	X
Rent on building	3,500	0	X
Depreciation on equipment	850	0	X
Utilities	500	0.02	X
Supplies (soap, floor wax, etc.)	200	0.04	X
Administrative costs	1,200	0	X
Total cost equation	$12,050	$2.78	X

C.

Total costs = $12,050 + ($2.78 * 8,500)

Total costs = $12,050 + 23,630 = $35,680