Question

The managerial accountant at Fast and Mean Manufacturing reported that the organization contains an automated production line to manufacture and produce its products for consumers to enjoy in the marketplace. The managerial accountant reported that the company uses the high-low method to estimate the costs in the new budget. The managerial accountant reported the following information:

Month	Total Machine-Hours	Total Costs
January	250,000	$5,500,000
February	248,000	$5,260,000
March	249,000	$5,400,000
April	248,000	$5,220,000
May	238,000	$5,180,000
June	230,000	$5,130,000

Compute the slope of the mixed cost, or the variable cost per unit of activity.

Compute the vertical intercept, or the fixed cost component of the mixed cost.

What is the mixed cost equation?

Answer 1

As per high-low method,

Variable cost per unit

=

(Total Cost at highets level-total cost at lowest level)/(Highest level of activty-Lowest level of activity)

=

(5500000-5130000)/(250000-230000)

=

$                18.50

Now fixed cost is calculated as follows,

Either at Higest level

or

at Lowest Level

Total Cost

$       55,00,000

$       51,30,000

Less Variable cost

$       46,25,000

$       42,55,000

(250000*18.50)

(230000*18.50)

Fixed Costs

$          8,75,000

$          8,75,000

So,

The slope of the mixed cost, or the variable cost per unit is $ 18.50 per machine hour,

Vertical intercept, or the fixed cost component of the mixed cost is

$ 8,75,000

and Mixed Cost equation

=

Fixed Cost + (Variable cost per unit x Total Units of activity )

or,

Y

=

a+bx

Where,

Y

Total cost at level of activity

a

Fixed Costs

b

Variable cost per unit

x

Units of actiivty