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In: Accounting

At the high and low levels of activity during the month, direct labor hours are 90,000...

At the high and low levels of activity during the month, direct labor hours are 90,000 and 40,000, respectively. The related costs are $165,000 and $100,000. What are the fixed and variable costs at any level of activity?

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Expert Solution

Answer- Variable Cost per hour = $1.3 per hour.

Total variable cost at 90000 direct labor hours = $117000.

Total fixed costs = $48000.

Explanation:-High-Low Method:-

Variable Cost per Unit

Variable cost per unit (b) is calculated using the following formula:

Variable cost per unit = (Y2-Y1)/(X2-X1)

Where,
y2 is the total cost at highest level of activity;
y1 is the total cost at lowest level of activity;
x2 are the number of units/miles/ labor ,machine hours etc. at highest level of activity; and
x1 are the number of units/miles/ labor, machine hours etc. at lowest level of activity

The variable cost per unit is equal to the slope of the cost volume line (i.e. change in total cost ÷ change in number of machine hours).

Total Fixed Cost

Total fixed cost (a) is calculated by subtracting total variable cost from total cost, thus:

Total Fixed Cost = (y2 – b)*x2 = (y1 – b*x1)

We have,
at highest activity: x2 = 90000 hours; y2 = $165000
at lowest activity: x1 = 40000 hours; y1 = $100000

Variable Cost per labor hour = ($165000 - $100000) /(90000 hours − 40000 hours)  

= $65000/50000 hours

= $1.3 per hour
Total variable cost on 90000 hours = 90000 hours*$1.3 per hour

= $117000

Total fixed costs= $165000 - $117000

= $48000

ekkarill92 answered 2 years ago
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