A floral shop is analyzing the cost of making deliveries. They believe miles dri

Question

A floral shop is analyzing the cost of making deliveries. They believe miles driven is the cost driver of delivery van operating costs. Here is historical data on miles and costs. Use the High-Low method to determine the cost function for this cost. What would predicted van operating costs be at 19436 miles? Miles Driven: January 15500 February 17500 March 14400 April 16400 May 16900 June 15300 July 13500 Van Operating Costs January 5400 February 5350 March 4980 April 5280 May 5580 June 5010 July 4590

Explanation / Answer

Solution:

Part 1 --- Determination of Cost Function

This question is related to the High Low Method for calculating the Variable and Fixed Cost.

High Low Method

Under High-low method, the variable cost per unit is estimated by dividing the difference of cost at highest and lowest level of activity by the difference in highest and lowest level of activity.

In other words, we are required to find out the followings:

1) The highest level of activity = 17,500 Miles in February

2) The lowest level of activity = 13,500 Miles in July

3) Difference in Highest and lowest level of activity = 17,500 – 13,500 = 4,000 Miles

4) Total cost at highest level of activity = $5,350 in February

5) Total cost at lowest level of activity = $4,590 in July

6) Different in total cost at highest and lowest level of activity = $5,350 - $4,590 = $760

Then, we need to find out the difference between highest and lowest level of activity as well as different in total cost at highest and lowest level of activity.

Now, we can calculate the variable cost per unit by using following formula:

Variable Cost per Unit = (Cost at highest activity level – Cost at lowest activity level) / (Highest Activity – Lowest Activity)

Now, we solve the question:

1) The highest level of activity = 17,500 Miles in February

2) The lowest level of activity = 13,500 Miles in July

3) Difference in Highest and lowest level of activity = 17,500 – 13,500 = 4,000 Miles

4) Total cost at highest level of activity = $5,350 in February

5) Total cost at lowest level of activity = $4,590 in July

6) Different in total cost at highest and lowest level of activity = $5,350 - $4,590 = $760

Variable Cost per mile = Difference in total cost at highest and lowest level of activity / Difference in activity level

= $760 / 4,000

= $0.19 per mile

Fixed Cost can be calculated by putting variable cost per mile at highest or lowest activity.

Total Cost at highest level of activity = Total variable cost + total fixed cost

$5,350 = Total Variable cost $0.19 Variable Cost per mile * 17,500 Miles + Fixed Cost

Fixed Costs = $5,350 - $3,325 = $2,025

Cost Function for this cost = Fixed Cost + Variable Cost per mile x Activity level

Cost Function = $2,025 + $0.19*q or activity level

Part 2 – Total Van Operating Cost at activity level 19,436 miles

Total Operating Costs = Total Fixed Costs + Total Variable Costs

= $2,025 + (19,436 miles x $0.19)

= $2,025 + $3,692.84

= $5,717.84

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.