33) Plankton Co. h complaints. The costs associated with this customer Web site

Question

33) Plankton Co. h complaints. The costs associated with this customer Web site over the past six months are listed be as a customer Web site to take orders, answer customer questions, and address customer low: Customer Web site Number of Web Month site hits 11,60 8,96 $8.76 $9,032 $8,94 $8,420 $8,49 March April Ma 11.72 11,57 Management at Plankton Co. believes that the customer Web site costs are a mixed cost and would like to use the high-low method to estimate their future costs using the number of Web site hits in any given month as the cost driver. Required 1. Using the high-low method, estimate the variable cost per Web site hit and the monthly fixed costs associated with the customer Web site. 2. Use the results you computed in Requirement 1 to write the cost equation to estimate the customer Web site expenses for Plankton Co. 3. If Plankton Co. expects 9,500 Web site hits for July, what are their anticipated customer Web site costs for July?

Explanation / Answer

Solution:

Part 1 --

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 difference in highest and lowest level of activity.

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

Highest Activity = Number of website hits = 11,720 in March = Total Cost $9,032

Lowest Activity = Number of website hits = 10,700 in May = Total Cost $8,420

Variable Cost per web site hit = (Cost at highest activity level 9,032 – Cost at lowest activity level 8,420) / (Highest Activity 11,720 – Lowest Activity 10,700)

= $612 / 1020

= $0.60 per web site hit

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

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

$9,032 = ($0.60*11,720) + Fixed Cost

Fixed Cost = $9,032 - $7,032 = $2,000

Part 2 –

Cost equation will be as follows:

Y = Fixed Costs + Variable Cost per web site hit x number of website hits

Y = $2,000 + 0.60q

Here, Y = Total Cost

$2,000 = Fixed Cost

0.60 = Variable Cost per Web Site

q = quantity

Part 3 –

Total Cost at 9,500 web site hit = Fixed Cost $2,000 + Variable Cost (9500*0.60)

= $2,000 + $5,700

= $7,700

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

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