Question

Mears Production Company makes several products and sells them for an average price of $75. Mears' accountant is considering two different approaches to estimating the firm's total monthly cost function, account analysis and high-low. In both cases, she used units of production as the independent variable. For the account analysis approach, she developed the cost function by analyzing each cost item in June, when production was 1,900 units. The following are the results of that analysis:

Cost Item	Total Cost	Variable Cost	Fixed Cost
Direct materials	$7,220	$7,220	$0
Direct labor	$9,500	$9,500	$0
Factory overhead	$8,670	$5,510	$3,160
Selling expenses	$6,470	$2,850	$3,620
Administrative expenses	$4,700	$0	$4,700
Total expenses	$36,560	$25,080	$11,480

For the high-low method, she developed the cost function using the same data from June and data from May, when production was 2,350 units and total costs were $43,350.

After developing the two cost functions, the accountant used them to make predictions for the month of October, when production was expected to be 2,250 units.

REQUIRED [ROUND UNIT COSTS TO THE NEAREST CENT AND TOTAL COSTS TO THE NEAREST DOLLAR.]

Part A
1. Using account analysis, what was the accountant's estimate of total fixed costs for October?    

2. Using account analysis, what was the accountant's estimate of total variable costs for October?   

Part B
1. Using the high-low method, what was the accountant's estimate of total fixed costs for October?    

2. Using the high-low method, what was the accountant's estimate of variable costs per unit for October?   

Answer 1

Part-A
1. Calculation of accountant's estimate of total fixed costs for October, Using account analysis:
Cost Item	Fixed Cost
Factory overhead	3160
Selling expenses	3620
Administrative expenses	4700
Total Fixed Cost	11480
2. Calculation of accountant's estimate of Variable cost per unit for October, Using account analysis:
Cost Item	Variable Cost
Direct materials	7220
Direct labor	9500
Factory overhead	5510
Selling expenses	2850
Total variable Cost (A)	25080
Number of units (B)	1900
Variable Cost per unit (A/B)	13.2
Part B	units	Costs
Highest level of production	2350	43350
Low level of production	1900
Total cost of low level production (11480+25080)		36560
	caclulation
variable cost per unit	(43350-36560)/(2350-1900)	15.09
1) Fixed cost (43350-(2350*15.088)		7891
2) Variable cost (2250*15.089)		33950