Question

High-Low Method, Cost Formulas

During the past year, the high and low use of three different resources for Fly High Airlines occurred in July and April. The resources are airplane depreciation, fuel, and airplane maintenance. The number of airplane flight hours is the driver. The total costs of the three resources and the related number of airplane flight hours are as follows:

Resource	Airplane Flight Hours			Total Cost
Airplane depreciation:
High	44,000			$ 18,000,000
Low	28,000			$ 18,000,000
Fuel:
High	44,000			445,896,000
Low	28,000			283,752,000
Airplane maintenance:
High	44,000			16,768,000
Low	28,000			11,736,000

Required:

Use the high-low method to answer the following questions. If an answer is zero, enter "0". If required, round your answers to nearest dollar.

1. What is the variable rate for airplane depreciation?
$per flight hour

What is the fixed cost for airplane depreciation?
$

2. What is the cost formula for airplane depreciation?

Total cost of airplane depreciation = $

3. What is the variable rate for fuel?
$ per flight hour

What is the fixed cost for fuel?
$

4. What is the cost formula for fuel?

Total cost of fuel = $ x

5. What is the variable rate for airplane maintenance?
$ per flight hour

What is the fixed cost for airplane maintenance?
$

6. What is the cost formula for airplane maintenance?

Total cost of airplane maintenance = $
+ ( $ × )

7. Using the three cost formulas that you developed, predict the cost of each resource in a month with 36,000 airplane flight hours. (Note: Do not round intermediate calculations.)

Total cost of airplane depreciation	$
Total cost of fuel	$
Total cost of airplane maintenance	$

Answer 1

1. Ans:

Variable cost of depreciation = 0 (I.e There is no variable cost because there is no cost for each flight or hours of flight )

Fixed cost of depreciation = $18,000,000

Total cost of 18,000,000 , It is a fixed cost

2.Ans:

Cost Formula for airplane Depreciation

=Variable cost per Hour* Number of hours + Fixed Cost

Total Depreciation Cost=(0*44000) + $18,000,000=$18,000,000

3.Ans:

Variable Fuel cost per unit in case of 44,000 airplane flight hours = 445,896,000/44,000 = $10134

Variable Fuel cost per unit In case of 28,000 airplane flight hours = 283,752,000/28,000 = $10134

Fixed Cost(We can take whether High or low any one)=Total cost-Variable cost

   =445896000-10134*44000=0

4.Ans:

Total cost of fuel = $ x Number of airplane flight hours

In case of 44,000 airplane flight hours = 44,000*10,134 = $445,896,000

In case of 28,000 airplane flight hours = 28,000*10,134 = $283,752,000

5.Ans:

Airplane maintenance cost per Hourat 44,000 airplane flight hours = 16,768,000/44,000 = 381.09

Airplane maintenance cost per Hour at 28,000 airplane flight hours = 11,736,000/28,000 = 419.14

Since the total cost per Hour and the total maintenance cost is different, the total cost is including both variable & fixed portion

Variable cost per Hour = Change in total cost / change in hours

= (16,768,000- 11,736,000) / (44000-28000) = 314.5

Fixed cost = 11,736,000-(314.5*28000) = $2930000

6.Ans:

cost formula for Airplane Maintenance = (Variable cost per hour X total hours) + fixed cost

Total Fuel cost = (341.5X44000) +2930000 = $17956,000

7 Ans:

Cost for the plane with flight hours 36,000

Total cost of Annual Depreciation =(Variable cost per hour X total hours) + fixed cost =(0X36000)+18000000 = $ 18,000,000

Total cost of Fuel = (Variable cost per hour X total hours) + fixed cost =(10134X36000)+0 = $ 364,824,000

Total Cost of Airplane Maintenance Cost = (Variable cost per hour X total hours) + fixed cost = (314.5X36000)+ 2930000= $ 14,252,000