Question

In: Accounting

Your company is considering an expansion and preparing budgets with and without the expanded activities. You...

Your company is considering an expansion and preparing budgets with and without the expanded activities. You have been asked to predict the cost of shipping at several different activity levels. You believe pounds shipped is a good cost driver and you have gathered historical data from the last 6 accounting periods, as summarized in the following table: Total cost of shipping Number of pounds shipped Period 1 93740 25000 Period 2 75040 19500 Period 3 82350 22400 Period 4 82260 21300 Period 5 76800 19900 Period 6 89700 23800 You choose to use the High-Low method of estimating the fixed and variable components of a mixed cost. 1. What is the variable cost per pound? (Round to the nearest penny)

2. What is the fixed cost per period for shipping? (Round to the nearest dollar)

3. Use your results to predict the total cost of shipping in period 7 if 50000 pounds are expected.

Solutions

Expert Solution

Period 1                               93740    25000
Period 2                               75040    19500
Period 3                               82350    22400
Period 4                               82260    21300
Period 5                               76800    19900
Period 6                               89700    23800

Answer 1.

Highest Cost of Shipping = $93,740
Highest Number of pounds shipped = 25,000

Lowest Cost of Shipping = $75,040
Lowest Number of pounds shipped = 19,500

Variable Cost per pound = (Highest Cost of Shipping - Lowest Cost of Shipping) / (Highest Number of pounds shipped - Lowest Number of pounds shipped)
Variable Cost per pound = ($93,740 - $75,040) / (25,000 - 19,500)
Variable Cost per pound = $3.40

Variable cost per pound = $3.40

Answer 2.

Highest Cost of Shipping = $93,740
Highest Number of pounds shipped = 25,000
Variable Cost per pound = $3.40

Fixed Costs = Highest Cost of Shipping - Highest Number of pounds shipped * Variable Cost per pound
Fixed Costs = $93,740 - 25,000 * $3.40
Fixed Costs = $8,740

Fixed cost per period for shipping = $8,740

Answer 3.

Number of pounds shipped = 50,000
Fixed Cost per period for shipping = $8,740
Variable cost per pound = $3.40

Total Cost = Number of pounds shipped * Variable cost per pound + Fixed Cost per period for shipping
Total Cost = 50,000 * $3.40 + $8,740
Total Cost = $178,740

Estimated cost of shipping 50,000 pounds is $178,740

ekkarill92 answered 1 year ago
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