Arlo\'s T-shirt shop only has four costs: T-shirt cost, rent cost on the shop, s

Question

Arlo's T-shirt shop only has four costs: T-shirt cost, rent cost on the shop, shipping cost, and utilities cost. Arlo's sells the T-shirt for $21 each. Management has prepared the following estimated cost information for next month:

At 10,000 t-shirts

At 20,000 t-shirts

T-shirt cost

$45,000

$90,000

Rent cost

$27,000

$27,000

Shipping cost

$28,000

$38,000

Utilities cost

$28,000

$33,000

Assume that all of the activity levels mentioned in this problem are within the relevant range. Use the High-low method to determine the cost formulas for each cost. (HINT: first determine which costs are fixed, variable or mixed. For mixed costs, use the high-low method to determine the cost line equation for that cost).

REQUIRED:

1. Calculate what Arlo's should expect for total variable cost if 9,000 t-shirts are sold next month (include purely variable costs and the variable portion of mixded costs).

2. Prepare Arlo's contribution approach income statement for a monthly sales volume level of 21,000 t-shirts (remember, the mixed costs have both a fixed element and a variable element.)

At 10,000 t-shirts

At 20,000 t-shirts

T-shirt cost

$45,000

$90,000

Rent cost

$27,000

$27,000

Shipping cost

$28,000

$38,000

Utilities cost

$28,000

$33,000

Explanation / Answer

1)

T-shirt cost = {($90,000 - $45,000)/10000}

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