Kim Wilson, controller for Max Enterprises, has decided to estimate the fixed an

Question

Kim Wilson, controller for Max Enterprises, has decided to estimate the fixed and variable components associated with the company's shipping activity. She collected the following data for the past six months: Package shipped and Total Shipping costs 10------ $800 20------$1,100 15------$900 12------$900 18------$1,050 25------$1,250 Estimate the fixed and variable components for the shipping costs using the high-low method. Using the cost formula, predict the total cost of shipping if 14 package are shipped.

Explanation / Answer

Using high low method ,we can calculate Variable cost as

= (y2 - y1) / ( x2-x1)

Where y2 is cost at highest level of package shipped, $ 1250

y1 is cost at lowest level of package shipped , $ 800

x2 is highest number of package shipped, 25 package

x1 is lowest number of package shipped , 10 package

Variable cost = ( 1250 -800) / (25-10)

450 / 15, =$ 30 per package

Now fixed cost can be calculated as

Say, Total variable cost at 25 package level = 25 package x $ 30 , = $ 750

Total cost at 25 package level = $ 1250

Fixed cost = Total cost - variable cost

= 1250 - 750 , = $ 500

Now shipping cost at 14 package level will be

Fixed cost = 500

Variable cost = 14 Package x 30, = 420

Total = 500 +420

= $ 920

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