The Green Shoe Company has manufactured a new line of shoes. You have been given

Question

The Green Shoe Company has manufactured a new line of shoes. You have been given the task of evaluating the costs and determining the break even point of this new production line Because this product line consists of mixed costs, you have decided to use the "High/Low" method to sample the production the output and to calculate the variable and fixed costs. Using the following Information, determine the variable cost rate and total fixed costs of this new line of shoes: Variable Cost Rate calculation: Calculations using "High" output information: Calculations using "Low" output information: Calculate the break even point if these shoes sell for a price of $6.50 each.

Explanation / Answer

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/labor hours etc. at highest level of activity; and
x1 are the number of units/labor hours etc. at lowest level of activity

Variable Cost per Unit =(52000-38000)/(20000-10000)

                                        = 1.4

Calculation using high output information:-

Variable cost = 1.4*20000 = $28000

Fixed cost      = 52000-28000= $24000

Calculation using low output information:-

Variable cost = 1.4*10000 = $14000

Fixed cost      = 38000-14000= $24000

Breakeven sales calculation:-

Contribution = 6.50-1.4=5.1

Fixed cost = 24000

Breakeven units = 24000/5.1 = 4606 units

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