Question

Exercise D2-11

Crane Flower Cart incurred the following monthly costs.

			Bouquets Sold
			5,000				7,500				10,000
Balloons (10 per bouquet)			$	10,000			$	14,000			$	18,000
Insurance			$	5,000			$	5,000			$	5,000
Delivery			$	5,500			$	7,750			$	10,000
Employee compensation			$	10,000			$	12,500			$	15,000
Advertising			$	1,500			$	1,500			$	1,500

Using the form y = mx + b, estimate the cost formula for each cost incurred by Crane Flower Cart. (Round unit cost to 2 decimal places, e.g. 52.75. If the cost equation has no variable component enter 0 for the amount.)

Balloons

Insurance

Delivery

Employee Compensation

Advertising

Answer 1

Answer:

As per High-low method, Variable Cost per Unit = y2 – y1 / x2 – x1
Total Cost at Highest Level of Activity = y2
Total Cost at Lowest Level of Activity = y1
Total Units at Highest Level of Activity = x2
Total Units at Lowest Level of Activity = x1

Total Cost = b + mx
Total Cost = Fixed Cost + (Variable Cost per Unit * Units)

Balloons:
Total Cost at Highest Level of Activity (y2) = $18,000
Total Cost at Lowest Level of Activity (y1) = $10,000
Total Units at Highest Level of Activity (x2) = 10,000
Total Units at Lowest Level of Activity (x1) = 5,000

Variable Cost per Unit = (18,000 – 10,000) / (10,000 – 5,000)
Variable Cost per Unit = 8,000 / 5,000
Variable Cost per Unit = $1.60 per Unit

Total Cost = b + mx
$18,000 = b + ($1.60 * 10,000)
b = $2,000

Fixed Cost is $2,000.

Balloons = $2,000 + $1.60x

Insurance:
As, Total Cost remains same at all units of Bouquets sold. Therefore, Variable Cost per Unit is Zero.

Fixed Cost (b) = $5,000
Variable Cost per Unit (m) = $0

Insurance = $4,000 + $0.00x

Delivery:
Total Cost at Highest Level of Activity (y2) = $10,000
Total Cost at Lowest Level of Activity (y1) = $5,500
Total Units at Highest Level of Activity (x2) = 10,000
Total Units at Lowest Level of Activity (x1) = 5,000

Variable Cost per Unit = (10,000 – 5,500) / (10,000 – 5,000)
Variable Cost per Unit = 4,500 / 5,000
Variable Cost per Unit = $0.90 per Unit

Total Cost = b + mx

$10,000 = b + ($0.90* 10,000)
b = $1,000

Fixed Cost is $1,000.

Delivery = $1,000 + $0.90x

Employee Compensation:
Total Cost at Highest Level of Activity (y2) = $15,000
Total Cost at Lowest Level of Activity (y1) = $10,000
Total Units at Highest Level of Activity (x2) = 10,000
Total Units at Lowest Level of Activity (x1) = 5,000

Variable Cost per Unit = (15,000 – 10,000) / (10,000 – 5,000)
Variable Cost per Unit = 5,000 / 5,000
Variable Cost per Unit = $1.00 per Unit

Total Cost = b + mx
$15,000 = b + ($1.00* 10,000)
b = $5,000

Fixed Cost is $5,000.

Employee Compensation = $5,000 + $1.00x

Advertising:
As, Total Cost remains same at all units of Bouquets sold. Therefore, Variable Cost per Unit is Zero.

Fixed Cost (b) = $1,500
Variable Cost per Unit (m) = $0

Advertising = $1,500 + $0.00x